Self-directed IRAs LLC’s can provide a more secure and lucrative wealth-building tool than more traditional self-directed IRAs
For most people, the thought of money sitting idly in a retirement account is as unnerving as hearing fingernails on a blackboard. Many conscientious contributors to IRAs and long-term employees with healthy company 401(k)s have chomped at the bit awaiting retirement age when they could access their hard-earned money to make it work for them without distribution penalties.
The good news is that these folks can stop coveting those funds, because they can access their IRA money before the “official” age of retirement (59 1/2) without taking an early distribution. These funds can be used to make passive or active investments, potentially generating more lucrative and dependable returns. Investments such as real estate, tax liens, mortgage notes and a host of others can be made easily through a self-directed IRA.
Thanks to the Employee Retirement Income Security Act of 1974 (ERISA), retirement-account holders have had the option to “self-direct” their funds into nearly any investment arena of their choice. And because these purchases act just like any traditional investment (i.e., stocks, bonds, mutual funds), the profits are realized tax-deferred within the IRA.
This purchasing flexibility, money-making potential and opportunity to truly diversify one’s portfolio are driving the phenomenal growth of the self-directed IRA industry. Financial services companies that structure self-directed IRAs are seeing the self-directed IRA market grow as the country’s largest demographic—the Baby Boomers—edge closer to the age of retirement.
Baby Boomers and others concerned about their retirement years are eyeing their individual retirement accounts like never before. Not only are they concerned about financial security for their golden years, but they are recognizing that they have more opportunities to realize more secure and substantial returns through a self-directed IRA over a traditional IRA.
There are two primary types of self-directed IRA structures available to investors. The original and most common type of self-directed IRA is the “conventional custodial account” which utilizes an IRA custodian to manage investor funds outside of the stock market. A more recent option, which has come about in the last 10 years, offers more control and flexibility to investors through a self-directed IRA structured as a self-directed IRA LLC.
Conventional Custodial Self-directed IRA
Most self-directed IRAs are held by custodians that limit self-directed investing to either traditional (i.e., securities) or non-traditional (i.e., real estate). Those IRA custodians who allow non-traditional investments charge fees based on the account value, number of transactions and types of services utilized. The most common fees include asset, transaction and holding fees. These can add up quickly for investors who intend to make numerous investments or who have an IRA account with assets over $50,000. Additionally, a conventional custodian will need to grant permission for each investment the account-holder makes, which makes time-sensitive transactions like tax liens and foreclosure purchases very challenging.
Self-Directed IRA LLC
In answer to the high fees and lengthy transaction times of traditional custodians, this new type of self-directed IRA or
real estate IRA emerged, giving more hands-on control to the investor. With a self-directed IRA LLC structure in place, account holders can purchase both traditional and nontraditional investments within the same self-directed account. They also have immediate access to their retirement funds through checkbook control with no transactional fees, holding fees or other asset-based fees. Investors utilizing this structure are able to make real estate purchases, buy tax liens, offer personal loans and make a wide variety of other nontraditional investments as quickly as writing a check—and without the burden of working through a custodian.
These self-directed IRAs are created in conjunction with a Limited Liability Company (LLC). While these structures can differ slightly depending on the account provider, Guidant Financial Group of Bellevue, Wash., a leading provider of alternative investment vehicles and retirement-account funding, creates the IRA LLC using the following process:
1. Establish a new self-directed IRA for the client.
2. Roll a client’s current IRA, 401(k), 403(b), Keogh, etc., into the new self-directed IRA.
3. Establish a customized LLC for the client. This LLC is specially structured to be owned by the new IRA and to conform to all IRS/DOL guidelines.
4. Have the new self-directed IRA invest in the LLC by purchasing members units of the LLC, then roll up to 100% of the client’s new IRA funds into the newly formed LLC bank account.
This final transaction means that the funds are no longer held with the self-directed IRA custodian; they are at the client’s bank in the LLC checking account under their personal supervision. The LLC can now invest in both standard and nonstandard assets.
While true diversification, significantly lower fees and the ability to make time-sensitive investments are the most prominent benefits of the self-directed IRA LLC, they certainly are not the only ones. Those who invest in rental-income properties have a particular advantage because the LLC owns the purchased real estate; thus, the investor can manage the assets of his/her account. This means that they can screen for tenants, mow the lawn and collect the rent, which goes tax-deferred into their retirement account. A conventional custodian-held IRA would have to outsource property management, resulting in substantial expense over time.
No matter which structure account holders choose, there are significant benefits to a self-directed IRA that are not available to traditional IRAs. This is especially true in light of today’s credit crunch. Because account holders are tapping into their own retirement funds to purchase real estate or other investments, the use of leverage is not necessary. Additionally, investors can make loans with retirement funds to those who are unable to secure loans from traditional lending institutions. This provides an excellent investment opportunity, as private lenders can usually beat the high interest rates of banks and still make a healthy profit.
From buying timberland in New Zealand to investing in Arizona retirement centers, those with self-directed IRAs can direct their hard-earned retirement money just about wherever they choose—and with a self-directed IRA LLC, whenever they choose. Self-directed IRAs provide the ideal route for account holders to build their retirement savings and put their financial future back under their own control.
More Information: Self Directed IRA LLC & Small Business Financing
