Integrating a Stock Portfolio with Your Self-Directed IRA
When investors establish a self-directed IRA LLC, they are primarily focused on the ability to invest in non-traditional assets such as real estate, trust deeds and the like. Many folks are not aware that a Checkbook IRA can hold conventional financial products like stocks, bonds and mutual funds as well.
When we say the IRA LLC can invest in anything the IRS rules allow for, we mean it.
Even if your investing focus is something like rental properties, it can be beneficial to have access to the stock market for diversification and a means to keep capital that would otherwise be idle actively deployed.
We regularly get calls or emails from clients wondering how they can put some of the capital in their IRA LLC into stocks, and thought it would be a good topic to cover here on the blog.
What is your Goal with Stock Investing?
There are two means you can use to balance a stock portfolio with your non-traditional investments. You can hold stocks inside your IRA LLC, or you can choose to hold stocks in a separate IRA. Which option will best suit your needs will depend on the amount of capital you are wanting to have in conventional assets and the risk exposure that may be associated with your non-conventional assets.
If your goal with equities investing is simply to keep a relatively small amount of earnings and contingency reserves active instead of in cash, then it will be simplest to open a brokerage trading account inside your IRA LLC.
If you will be putting a significant amount into standard financial investments, it may make sense to maintain a separate IRA for that purpose. This is especially true if the assets you invest into in the IRA LLC create liability risk, such as rental properties.
In some cases, it may make sense to use both approaches, with a small brokerage account inside the IRA LLC to keep capital productive, and a separate IRA to isolate a larger stock portfolio from liability risk.
Holding Stocks Inside your IRA LLC
Holding stocks within your checkbook IRA LLC is quite simply. Just go to a brokerage house and open an account in the name of the LLC. This is no different than when the LLC was initially setup and a bank account was established. The account will simply be a commercial trading account in the name of the LLC, using the LLC tax ID.
Note that not all brokerage institutions are friendly to the Checkbook IRA LLC model and may not open an account. TD Ameritrade has been a reliable option. Fidelity, E*Trade, and Vanguard will not currently open accounts for an IRA-owned LLC – believing they may in some indirect way be viewed as a “fiduciary” to the IRA. Many other specialty brokerages, especially those with managed account services, will open accounts for an IRA LLC. Be sure to ask in advance before taking the time to complete an application.
The key advantage of holding a trading account inside the LLC is flexibility and simplicity. You can move money between a bank account and brokerage account held by the LLC at will. This is not any kind of IRA rollover that requires special reporting. You are just moving funds held within the LLC between different LLC held accounts.
If you are investing in rental properties or mortgages for example, and receive monthly income from those investments, it can be nice to drop that income into some kind of interest bearing vehicle or a simple, low cost indexed mutual fund. Such investments have the potential to produce a bit of extra return, yet can be liquidated to cash and made available to the LLC quickly as needed.
The potential disadvantage of holding significant amounts of cash or stocks within the IRA LLC, however, would be liability exposure. If your non-traditional investments include assets such as trust deeds or shares of privately held entities, there is likely very little risk. If, however, your IRA LLC holds direct title to a rental property or is engaging in flipping houses, then there could be the risk of a lawsuit against the LLC. A good insurance policy will always be your first line of defense, but it would be foolish to have a large amount of cash or stocks within the LLC that could be used to satisfy a judgment against the LLC.
Isolating Stocks in a Separate IRA
In cases where you have significant non-risk assets such as cash or stocks, and are also using the IRA LLC to pursue risk exposed assets such as real estate, it may be better to keep the two components of your overall portfolio separate. Keep the IRA LLC focused on real estate, and maintain a separate IRA with a brokerage firm to manage your conventional assets.
With this approach, you are creating asset segregation, and protecting the non-risk assets from liability that may be associated with the risk assets.
The disadvantage is that it becomes more cumbersome to move capital between the two asset classes.
If you accumulate excess cash in the IRA LLC and want to move it to your brokerage IRA, you have to first send cash from the LLC back to your self-directed IRA account, then have the brokerage institution request a trustee-to-trustee transfer. This process can take between 2-3 weeks, and will come with some processing and wire fees.
The process to move cash from a brokerage IRA to the IRA-owned LLC is similar. You would initiate a request for a trustee-to-trustee transfer with your self-directed IRA custodian. Once the funds are received from the brokerage institution, they then need to be invested into the LLC and sent to the LLC operating account.
Because of the paperwork involved, time delay, and processing fees, this type of portfolio reallocation is generally not something you want to do more than once or twice a year.
Nobody said you cannot have the best of both worlds, with both flexibility and asset segregation. We have many clients who maintain a small brokerage account within their IRA LLC that they use to keep a moderate amount of capital in. They might keep 3 months of reserve expenses as a minimum, and let it build up to something like $15,000 – $20,000 at maximum. Once or twice a year, depending on how much capital they are working with and the rate of return, they will clear the LLC brokerage account down to the minimum threshold and send the balance to a separate IRA.
The bottom line is that you can keep things relatively simple, while at the same time maximizing the productivity and security of your hard-earned retirement savings.
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