Why Do You Need an LLC For a Self-Directed IRA?
An LLC provides considerable flexibility and control when investing in alternative assets like real estate or private businesses, while speeding up investments by eliminating custodial delays.
An LLC provides “checkbook control.” Without it, all investment decisions and purchases would go through your custodian which may add cost, time and hassle.
1. Limited Liability
Self-Directed IRA LLCs, more commonly referred to as Checkbook IRAs, allow investors to invest in alternative assets while remaining in control and minimizing transaction fees. To create one you will first need an LLC for holding your investments; then draft up an Employer Identification Number or tax ID; finally transfer funds from your SDIRA directly into this bank account of the LLC.
Implementing an LLC protects your personal assets from exposure to debts and obligations incurred by the entity, but there are certain guidelines you must abide by so as not to breach prohibited transaction rules. When setting up or managing an IRA LLC, working with knowledgeable professionals like those at IRA Resources is recommended – our experienced IRA team have extensive knowledge in setting up and overseeing such entities.
2. Pass-Through Income
Tax-wise, an LLC is considered a pass-through entity; profits and losses “pass through” directly to its members who report them on their tax returns. This feature of LLCs makes them suitable as self-directed IRA investments as it allows investors to invest in assets otherwise forbidden by IRS regulations (such as real estate considered “Prohibited Transaction”).
An IRA may utilize LLCs as a vehicle to invest in private businesses like hedge funds, startups, and REITs. They’re ideal as LLCs can reduce fees, processing times, and annual costs associated with investing these ways – though please be aware that an IRA cannot engage in transactions with disqualified people.
3. Diversification
An investment portfolio that is properly diversified can help you meet your long-term investment goals despite short-term losses or gains. Spreading out risk among multiple asset classes, industries, and maturities reduces overall risk while mitigating market fluctuations.
Diversification doesn’t ensure guaranteed returns; rather, for every massively profitable investment there will likely be many others that fizzle out. The goal should be to limit systematic risk rather than eliminate it entirely.
A self-directed IRA LLC structure gives self-directed IRA (SDIRA) owners more flexibility when investing alternative assets by enabling the IRA to make investments directly into an LLC, known as “checkbook control.” This way, no custodian fees or brokerage costs are needed every time an investment is made.
Nontraditional assets for investment by IRA investors often include real estate, private equity and startup companies. LLCs can often be used by these investors to purchase properties ranging from residential, commercial and raw land properties as well as building lots and contracts for sale or lease options.
4. Tax-Free Profits
If you plan to invest in real estate or alternative assets through an IRA, it may be worthwhile considering setting up an LLC as your Self-Directed IRA (SDIRA). An LLC structure eliminates the need to go through custodian approval for investment decisions and purchases – this saves both time and transaction fees.
By opening an LLC-owned bank account and setting up “checkbook control”, an IRA owner will gain what’s known as “checkbook control”. This can save money in transaction fees as well as reduce or even eliminate tax filing requirements for their IRA.
Contact an experienced SDIRA attorney to explore your options and begin. Our attorneys have expertise with various asset types such as real estate and private businesses.
5. Tax-Free Distributions
IRAs can purchase assets such as real estate and private businesses; the process involves setting up an LLC that is owned by the IRA in order to avoid prohibited transactions or any potential tax penalties.
An LLC owned by an IRA allows it to open a business checking account and invest directly in assets of choice without incurring custodian costs or transaction fees.
Before funds can be transferred from an IRA to the LLC bank account, an EIN and operating agreement must be secured and completed. Depending on the nature of investments made by the LLC, taxes may also need to be filed by them so it is wise to consult a tax or financial advisor in order to find out what option best suits your Self-Directed IRA.
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