Safeguarding your retirement funds is a crucial part of financial planning for most working individuals. A self-directed IRA LLC is a great way to add an extra layer of protection to your investments under the umbrella of a limited liability company.
Follow these steps to start a self-directed IRA LLC:
- Fix investment goals.
- Open up a self-directed IRA.
- Assign a custodian.
- Fund your self-directed IRA.
- Establish an LLC.
- Provide necessary documents.
- Set up a business bank account for the LLC.
- Acquire custodial approval.
- Fund the bank account.
Although the traditional IRAs serve the purpose of securing funds with a tax break, a self-directed IRA LLC offers a diversity of investments and checkbook control. Next, I will discuss the step-by-step process of starting a self-directed IRA LLC.
1. Fix Investment Goals
If you are considering making an investment or changing how your retirement fund is handled, you should always consult a professional to ensure you can meet and exceed your investment goals. This allows for a road map to be established, which can then be followed and executed at the right time.
Topics that require considerable due diligence and can easily be handled with the help of a professional include:
- Which type of IRA to choose?
- Where are you looking to invest?
- Are you considering alternative investments?
- Which state to establish an LLC in?
2. Open Up a Self-Directed IRA
SDIRAs differ from traditional IRAs because they offer a broader range of investment opportunities. Each type of SDIRA also enjoys the liberty to invest in alternative investments.
There are several types of self-directed IRAs (SDIRAs), and I will briefly describe each. All of these types can invest in an LLC while adhering to the rules and regulations of the IRS.
- Self-Directed Traditional IRA: SDIRA is a powerful tool for building long-term wealth. This type of IRA allows you to hold alternative investments, such as property, precious metals, cryptocurrency, and more. You can also make tax-deductible contributions to your IRA, pay taxes on withdrawals and control which investments the IRA sponsors.
- Self-Directed ROTH IRA: Under a ROTH IRA, your contributions are made from taxed income, while returns on investments and distributions are tax-free. Unlike a self-directed traditional IRA, which only allows withdrawals aged 59 ½ onwards, a ROTH IRA will enable you to withdraw funds after 5 years of owning the IRA. You can also use your ROTH IRA to get a checkbook control over your retirement funds so you can invest in what you want without having to pay taxes on your distributions.
- Self-Directed Solo 401(K): If you have a small business with no full-time employees other than your family, this is the right plan for you. It allows you to contribute to your 401(K) as both an employer and an employee, increasing your contribution rate. You can also personally borrow 50% of the total funds up to $50,000.
- Self-Directed SEP IRA: The Simplified Employee Pension offers small business owners the benefit of making larger contributions to the IRA. The employer can contribute to his own and his employees’ pensions. Contributions are tax-deductible up to 25% of the employee's total income.
- Self-Directed SIMPLE IRA: SIMPLE stands for Savings Incentive Match Plan for Employees. This plan fits businesses with up to 100 employees who do not already have an existing plan. The contributions under SIMPLE IRA are tax-deductible, and the earnings are tax-free until withdrawn.
- Self-Directed Inherited IRA: An inherited IRA is typically passed on to the person after the death of a family member, non-family member, or spouse. Even if you inherit a traditional IRA, you can still self-direct it, giving you the option to sponsor alternative investments.
- Self-Directed Health Savings Account (HSA): This plan is used for medical purposes. If you require medical treatment or medication that your insurance does not cover, this plan will help you cover the cost. The contributions are tax-deductible, while returns are tax-free.
- Self-Directed Education Savings Account (ESA): This plan is usually held by a custodian for a beneficiary and is used to pay for education expenses only. The beneficiary can also contribute as well as anyone else who wants to contribute. Contributions are taxed, whereas returns are tax-free.
- Qualified Recordkeeping Accounts: This plan offers you the ability to take out part of your pension plan and use it to invest in just about anything with the cooperation of your third-party administrator.
3. Assign a Custodian
Every type of self-directed IRA requires a custodian. A custodian is a financial institution that holds and manages the assets in an IRA. They also handle tax reporting and administer distributions. However, before going with a specific custodial service, ensure what type of investments they can hold and if they allow alternative investments.
Also, ensure that the custodial service you choose is adequately regulated by a state or federal agency.
There are several custodial services out there like Equity Trust, which would not only help you with providing custodial services but also educate you regularly. A service provider with adequate experience is imperative since they will handle your life savings and allows you to take advantage of the benefits of a self-directed IRA.
4. Fund Your Self-Directed IRA
Now that you have the custodian assigned, all you have to do is fund your SDIRA. If you intend to fund your SDIRA from an existing IRA or a qualified pension plan, like a 401 (K) consider the following options:
If you already have an IRA, you can have your present custodian transfer the funds to the custodian assigned for your new, self-directed IRA.
Note that the transfer must be between compatible IRA accounts. For instance, funds from a ROTH IRA may be transferred to a self-directed ROTH IRA.
Also, there is no limit on the amount you can transfer.
Funding your SDIRA through this method allows you to transfer funds from a qualified pension plan to your new, self-directed IRA.
In this instance, the custodian handling your 401 (K) or any other qualified pension plan can transfer funds to your SDIRA in two ways.
- Direct rollover: a direct rollover transfers the funds directly between your old and new custodian.
- Indirect rollover: your old custodian transfers funds to you, after which you have 60 days to move the amount to your SDIRA. Past 60 days, you'd be liable for tax.
5. Establish an LLC
Having your SDIRA associated with an LLC offers limited liability to the account holder. It also means that you get checkbook control over your investments.
Your SDIRA will then own the LLC, and you will be designated a manager for the Limited Liability Company. As a manager, you have control over which investments you fund and can also make instant payments without the approval of a custodian. In addition, investing through an LLC offers tax advantages. Contributions to an LLC are tax-deductible, and any profits or gains from investments held in the LLC are tax-deferred. As a result, investing through an LLC is a great way to get the most out of your SDIRA.
Investments must be made by adhering to the IRS regulations and steering clear of prohibited transactions. Failure to abide by these regulations will have repercussions.
Ideally, you should establish your LLC alongside opening up a self-directed IRA. This will save you precious time, and you will have your LLC set up by the time you establish your SDIRA.
6. Provide Necessary Documents
At this point, you would have to provide specific documentation to proceed further. Typically you will need the following documents.
- Article of organization
- Operating Agreement
- Tax identification number confirmation
- Direction of investment, IRA/LLC agreement
7. Set Up a Business Bank Account for the LLC
Once all the documentation is taken care of, and your LLC is set up, you'd need to open up a business bank account for the LLC to exercise checkbook control. Checkbook control will offer liberty to invest in alternative investments such as cryptocurrency without a custodian's approval.
8. Acquire Necessary Custodial Approval
Once you have set up a business bank account for your LLC, you will need to secure custodial approval of your self-directed IRA. This approval is required for your funds to be moved from an existing IRA to your new self-directed IRA LLC bank account. The contribution must be made directly from the property owner to the LLC.
9. Fund the Bank Account
Once the custodial approval is acquired, your SDIRA custodian can transfer the funds to your SDIRA LLC bank account after going through the necessary compliance review. This is where the setup process ends, and you can start looking for investment opportunities to build your retirement wealth.
Getting set up with a self-directed IRA LLC is a great way to invest in alternative assets like cryptocurrency and real estate. If you follow the guidelines above, the process is relatively simple. I hope this article helped answer any questions you might have about this topic, and I wish you the best of luck in your future investments.