Why Every Real Estate Investor Should Use an LLC Structure with their Self-Directed Retirement Plan
I often stress the importance of using LLCs as the best entity structure for your real estate deals. Here’s just another example of how LLCs offer maximum flexibility and protection when using your self-directed IRA to invest.
In this article, Self-Directed IRA Consultant, Satchie Carvounis, explains in detail, how and why this strategy protects you as an investor.
Did you know that you could purchase real estate, lend your money like a bank in notes and mortgages, purchase franchises or private equity in businesses and still have a brokerage account? Since 1974 and ERISA (Employee Retirement Income Security Act), you have been able to do this, but your broker and your banker will never let you know! Your broker and banker would lose commissions and income if you moved your assets from a brokerage account to any of the alternative investments mentioned.
Traditional retirement accounts lost 2 trillion dollars in the past 15 months, causing many savvy investors to seek alternative ways to invest their retirement portfolios. In increasing numbers, this search is leading to self-directed investing – a rapidly growing trend that enables you to have complete control over selecting and directing your own IRA, SEP or 401k investments.
How do you take advantage of these alternative investments? You can choose a self directed custodian or an administrator (who works with a custodian). Is it legal to move your IRA or rollover your old 401k to another custodian? Yes it is. Just as you could move your IRA account from Fidelity to Morgan Stanley, you are simply changing custodians. The change to a true self directed custodian allows you to take advantage of alternative investments. But not all custodians are alike – some allow you to invest in real estate, some do not. Some allow you to invest in real estate and finance it and others do not. To finance you would need to find a non recourse lender, where the only recourse for the lender if you default is to take the property and not come after you personally or your IRA.
Choosing a self directed IRA administrator to place the assets of your IRA in a Limited Liability Company (LLC) which holds title to the assets, can give you the ultimate flexibility in investing. The LLC is thus the purchaser of any investment the IRA makes.
WHAT ARE THE BENEFITS OF THE LLC?
- The LLC structure offers investment flexibility by simplifying asset titling and allowing for immediate response to investment opportunities.
- The LLC structure also facilitates the pooling of assets with other investors, or with the account owner’s discretionary investment money. Pooling opens the door for self-directed investors to participate in larger investment opportunities.
- Finally, the LLC structure offers an additional layer of protection for the Retirement Plan’s assets.
Most of the self directed IRA companies are custodians and not administrators. Custodians, as the fiduciary of your IRA funds, are not allowed to set up an LLC structure directly. The client would have to search for an ERISA lawyer. Setting up an LLC structure through a lawyer who is not familiar with ERISA rules and the results can be very damaging. The IRA/LLC structure must comply with ERISA rules and many of the lawyers who set these up without ERISA experience, are unable to advise their clients on the types of investments that are allowable by the IRS. If the IRS decides to do an audit, you could pay severe penalties and taxes if you’re not in compliance. Investors beware – you must do your homework and find a self directed administrator that understands ERISA rules and reviews them with each transaction. If you choose the route of a custodian, then be sure to find a lawyer with ERISA experience and be prepared to pay for their knowledge, and you will need to have the lawyer review your transactions for compliance.
The IRA/LLC structure also allows investors to invest in anything allowable by the IRS. Gold is a popular investment and a commodity that has limited resources. There are custodians who will not allow for investments in gold. The IRA/LLC structure allows you to invest in anything allowable by the IRS. Detailed reviews of each proposed transaction to ensure its compliance with IRS and ERISA rules are very important. Custodial companies review transactions internally for company acceptance and not so much with the client’s investing in mind. The IRA/LLC structure is the most elegant and flexible structure for an investor who wants to take advantage of all investments that are allowable by the IRS and ERISA.
Here’s a question I received recently on my blog about Self-Directed IRA fees:
“What I’ve found is the fees, to start, may be small but then I’ve been told that some charge for every check written too. That could get expensive. Am I wrong”?
After consulting with Satchie, here’s the answer:
That is true of some custodians. Every custodian or administrator is different. This is where Security Trust excels – we decided to charge a quarterly fee for management, which cancels all transaction fees, checks included and ACH batching to transfer funds. We also provide legal counsel if and when needed at no additional fee. We saw a lot of companies that were initially inexpensive to set up an account but then the fees came into play.If they have under $50k, it’s $74 a quarter, over $50k its .245{60b248ae312512e526eead8442a0432014d54242185dbfbbd7fd7d7776b828fa} per quarter or .98{60b248ae312512e526eead8442a0432014d54242185dbfbbd7fd7d7776b828fa} a year. If they have roughly $390k and above, they’re paying less than .98{60b248ae312512e526eead8442a0432014d54242185dbfbbd7fd7d7776b828fa}, because we have an upper limit charge per quarter. The lower minimum is low because people may open a Roth or a Traditional with us.
I compared this to my old UBS account and they charged me 1.6{60b248ae312512e526eead8442a0432014d54242185dbfbbd7fd7d7776b828fa} a year and either front loaded or back loaded 4-5{60b248ae312512e526eead8442a0432014d54242185dbfbbd7fd7d7776b828fa} as well. I see clients paying even more fees than that on brokerage accounts. Here’s what that quarterly fee covers:
- Quarterly Statement of Profit & Loss and a Balance Sheet and online access unlimited calls to our office for questions
- No additional transaction fees at all
- Legal counsel, if needed
- Bookkeeping and recordkeeping
- State filings for the LLC
- custodial fees paid
- Asset transfers, purchasing or selling an asset, or taking a distribution
- Annual valuation of the IRA assets
- Filing IRS forms (Form 5498)
- Custodian holds the membership interests of the LLC
- Funds transferred from the account within hours of receipt of the request (‘checkbook’ control)”
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan.
