What’s the difference between a standard Self-Directed IRA and a Self-Directed IRA with a LLC?
A standard Self-Directed IRA limits your investment choices to Wall Street products. A Self-Directed IRA with a LLC allows you to invest your retirement funds in many different asset classes, and it makes it incredibly easy to do so.
What is a LLC?
A LLC (Limited Liability Company) is a business entity with the following characteristics:
- The owner of the LLC is not personally responsible for any debts incurred by the LLC.
- The LLC is a pass-through entity. That means that the profits go to the owner, and are regulated from there.
The LLC does not possess as many requirements (or as much paperwork) as a standard corporation.
For a Self-Directed IRA, the LLC functions as an investment platform. The account holder will open a checking account in the name of the LLC, and will use that checking account to invest his/her retirement funds.
How does a Self-Directed IRA open up a LLC?
After a Self-Directed IRA is opened with a custodian, your facilitator will establish a LLC that is customized for your Self-Directed IRA. This involves getting an EIN, filling out the appropriate forms, and setting up the Operating Agreement so that it conforms to all necessary laws.
Theoretically this process could be performed without a facilitator. An individual investor could establish a new Self-Directed IRA by a qualified custodian, and then open a LLC for the account. However, this path could potentially be dangerous for your retirement account.
It’s very easy to fill out the requisite documents in ways which will not legally conform to Self-Directed IRA regulations. This could result in a rejection of your application, or even an implosion of your IRA with all of the accompanying penalties. With Broad Financial’s platform, the documents are guaranteed to be accurate and hassle-free.
How does a LLC allow a Self-Directed IRA to access alternative investment assets?
To understand why a LLC allows access, let’s look at why a standard IRA does not have access. A standard IRA is typically held by a custodian such as a brokerage whose profit schedule is heavily dependent upon Wall Street offerings. Because of this, the custodian’s platform only allows for investment in those specific products.
By moving away from a Wall Street stock-oriented custodian, your Self-Directed IRA is opening up a whole new investment vista. No longer confined by a bias towards stocks, bonds, and mutual funds, it can invest in almost any asset. In other words, the LLC allows for alternative assets by merely removing the custodial limitations. As non-compensated manager of your IRA’s LLC, you define its investment parameters, and you may do so without any limitation at all.
Does this also explain why a Self-Directed IRA will pay fewer fees when it works through a LLC?
Yes. Fees are typically accrued because the custodian would like to be reimbursed for various managerial and holding responsibilities. Using a LLC structure allows you to be appointed as manager of your IRA’s investing. This in effect cuts out the middle man (which in this case would be the managing custodian), and all the fees that would subsequently accrue as a result. Your Self-Directed IRA still needs to be held by a custodian, but the custodian will not have any managerial or transactional responsibilities.
Say goodbye to all of those transaction and asset-based fees.
Does a LLC structure add bureaucratic layers to a Self-Directed IRA?
Quite the opposite. A Self-Directed IRA that does not utilize a LLC structure, but rather uses a trust model, actually adds another layer to any transaction that your account undertakes. This is because when you want to make an investment, or pay bills for your account, you have to inform the custodian who will then execute the transaction on your behalf. With the LLC structure, you can accomplish these tasks by just writing a check.
Voila! Instantaneous investment and management without any accompanying hassles.
Does my Self-Directed IRA need a customized LLC?
Yes. The Operating Agreement for a LLC that works with retirement plans needs to be ERISA compliant. That means that it has to be structured in such a way that it abides by all the tax regulations that affect retirement plans. If the Operating Agreement is not structured properly, it could result in heavy fines and possible dissolution of the plan itself.
Can I get my lawyer to write up the customized LLC?
Yes. Here at Broad we worked with some of the nation’s top ERISA attorneys to construct an Operating Agreement that is fully compliant with tax regulations. Your own lawyer can do the same. However, the hours involved in the necessary research and development are normally not cost effective for a private investor. In that sense, Broad has already done the work for you and you can take advantage of that expertise at a competitive price.
Can I see the Operating Agreement used for the LLC?
If I open a Self-Directed IRA, am I the only director or stakeholder in my LLC?