What Is a Self-Directed IRA LLC

What Is a Self-Directed IRA LLC

When investing in alternative assets through a self-directed IRA, you need to be quick about taking advantage of opportunities as they arise. If you wait for your custodian to cut the check, you may experience delays and lose money. Fortunately, there's a solution.

A Self-Directed IRA LLC or Checkbook IRA is an investment strusture that allows you to invest in alternative assets through a limited liability company (LLC) owned by the IRA. With this, you get checkbook control and can complete transactions without waiting for the custodian to issue a check.

This article discusses in detail what a self-directed IRA LLC is, how it differs from a self-directed IRA, and its benefits and risks.  

Self-Directed IRAs vs. Self-Directed IRA LCCs

Self-Directed IRA LLCs are arguably more popular than self-directed IRAs due to their increased flexibility and freedom. 

The difference between the two accounts boils down to your degree of access to your funds and  control over transactions. With a Self-Directed IRA LLC, you have control over your retirement funds using a checkbook, while in a Self-Directed IRA, the custodian holds your funds and writes checks on your behalf

Self-Directed IRA LLC

To invest in a Self-Directed IRA LLC, you form or register a limited liability company (LLC) with your Secretary of State's office. The IRA owns the LLC and funds it to invest in alternative assets. 

Essentially, you have control over the LLC's checkbook, therefore managing the investment process yourself. Once you register the LLC, you open a bank account with the LLC name and receive a checkbook for investing your retirement account funds

With the checkbook control, you don't need the consent of your custodian to invest. This helps reduce costs and delays if you trade in active investments such as real estate rentals.

Self-Directed IRA

On the other hand, a self-directed IRA lacks the flexibility to let you carry out your own transactions. For example, if there's an asset you want to invest in, you'll have to write your custodian a request for payment approval. 

It may take time before your custodian approves the payment because you're one of thousands of clients, and each transaction must be reviewed and approved by a human being. A self-directed IRA is appropriate if you intend to invest in a passive source of income such as a precious metal. 

Also, the custodian charges a fee for every transaction in exchange for bearing administrative burdens. You'll incur charges for wiring funds, liquidating assets, writing cheques, and holding assets. 

Forming an LLC for a Self-Directed IRA 

You must form a new limited liability company to use for investing your retirement account funds. You can't use a previous one you had registered for other purposes. This is to ensure the company is owned 100% by your Self-Directed IRA.

Remember, it's the self-directed IRA that owns the LLC. You, as an indidual never own it because that would violate self-directed IRA regulations of prohibited transactions. 

Below are the steps to follow when opening an LLC. 

Step 1: Name the LLC

Your LLC's name should be unique — or at least, not too similar to anyone else's. You'll have to research online because using another company's name can cause copyright issues (not to mention confusion for anyone who deals with your company). Though LLC provisions differ from state to state, its name should always end with the LLC abbreviation.

Step 2: Choose a Legal / Registered Agent

You can serve as your own Registered Agent and use your home address if you plan to establish your LLC in your home state. If you plan to open your LLC outside your home state, you’ll be required to provide a physical address within that state, or you must choose a legal agent who resides in your state of operation. Their role is to receive and send legal papers such as court summons on behalf of your company. Since this is an important and sensitive role, make sure you choose that person carefully.  

Step 3: File the Article of Organization

The Article of Organization covers all the details pertaining to the identity of the LLC. It includes items such as:


  • Name and location of the LLC
  • The purpose of the LLC
  • Details of the registered agent, such as address and name

Step 4: Apply for an Employer Identification Number (EIN)

An EIN is an alternative to a Social Security Number. It helps you establish the LLC as a separate legal entity, distinct from your own personal SSN, or any other business you may operate. It's necessary to be able to open a business bank account to have checkbook control over your retirement funs.

Step 5: Create an Operating Agreement

The operating agreement used for a Self-Directed IRA LLC is unique when compared to a regular operating agreement. It must include all of the pertinent IRS rules regarding Prohobited Transaction, and other Self-Directed IRA rules . It includes:

  • Ownership of shares
  • Voting rights
  • Profit and loss sharing ratio
  • Rights of members 
  • Procedure of liquidation

Tax Considerations of a Self-Directed IRA LLC

The Internal Revenue Security (IRS) recognizes a single-member self-directed IRA LLC as a pass through entity for the purposes of taxation. In other words, all the income the LLC earns goes to the owner, who has to file an income tax return with the IRS, meaning your IRA LLC has no tax obligations. 

However, because the self-directed IRA is tax-deferred or tax free, the holder also doesn't need to report any income or pay income tax to the federal government. 

If an LLC has more than one member, it files for taxes with IRS as a partnership does. Because this LLC pays no tax on returns, its profits go to the partners according to their agreed-upon profit-sharing ratio. The tax burden goes to the self-directed IRA owners. 

Instance Where Taxation Occurs in Self-Directed IRA LLC

Some investments in self-directed IRA LLC may earn unrelated debt finance income (UDFI) or unrelated business income tax (UBIT), which are taxable.

  • Unrelated Business Income Tax (UBIT): UBIT is the gross income a self-directed IRA LLC makes from unrelated activities such as investing in an operating an active business. These earnings trigger UBIT tax, so you should record revenue net of tax. 
  • Unrelated Debt Finance Income (UDFI): UDFI occurs when a self-directed IRA obtains a loan to increase the revenue potential. Income earned from an investment funded through a loan tends to trigger UBIT. 

Self-Directed IRA LLC Investment Restrictions

Although Self-Directed IRA LLCs have a great deal of freedom in terms of investment options, there are a couple of activities you should avoid to preserve the tax advantages of your account. They include: 

Engaging in Prohibited Transactions

Your self-directed IRA LLC investment income is supposed to go to your retirement benefits. The IRS disregards any transaction that gives you immediate financial gains. Engaging in such transactions can lead to penalties and loss of tax-deferred privileges. 

Examples of prohibited transactions include: 

  • Transfer of investment assets or income to a disqualified person for their gains
  • Lending money to a disqualified person
  • Purchasing personal assets with IRA funds
  • Allowing an investment advisor to use your account for their interests

Transacting with Disqualified Persons

Because your custodian doesn't offer investment advice and isn't involved in managing your account, it's crucial to know the persons you shouldn't transact with. Examples of disqualified persons are:

  • You (the account holder)
  • An organization in which you own 50% of shares
  • Your beneficiaries or family members (your spouse, children, and siblings) 
  • Any person or entity providing investment services (custodian, fiduciaries, advisors)

Essentially, if you believe a specific investment will give rise to a potential conflict of interest, it's probably prohibited. 

Benefits of a Self-Directed IRA LLC

  • Liability protection: A self-directed IRA LLC acts as a legal person and is responsible for its profits and debts. As such, no one can hold you accountable for the obligation of the IRA LLC.
  • Control over the checkbook: You have control over your investment funds and don't need to go through your custodian to carry out transactions. This allows you to act fast when investment opportunities arise.
  • Diversification of investments: You get access to non-traditional assets such as real estate and private placements, which helps you build a solid portfolio. If one of the assets performs poorly, another one that performs well can cancel out your losses.
  • Fewer charges: Because you'll manage your account and transactions, you eliminate custodian fees and account valuation fees, saving you a few thousand dollars.
  • Tax deferment advantages: All earnings in your account are tax exempt until you withdraw them for retirement. The compounding effect allows your money to earn more interest in the long run.

Risks of Investing in a Self-Directed IRA LLC

  • Chances of buying illiquid assets are high: Custodians don't give advisory services to the account holder. If you fail to do adequate research, market swings can make it hard for you to sell your assets.
  • Trading Restrictions: Transacting with disqualified persons and conducting prohibited transactions can compromise your tax-deferred benefits, not to mention attract penalties. 
  • Fraud: The opportunity to trade in non-traditional assets opens the door for fraudsters. Failing to carry out a thorough background check on brokers can cause you to lose money. 

Final Thoughts

You should consider a self-directed LLC if you need hands-on control over your retirement investments and checkbook access. The LLC gives you pass-through taxation rights and lifts the liability burden in case of debts. However, you should avoid restricted transactions to maintain these tax privileges.