*This blog post is the first article of a two part series, be sure to check back for the second and final article.
There are several types of self-directed IRA, 401(k) and business funding programs available. If you are contemplating establishing such a plan so that you can take control of your retirement investing, you will want to start by making sure you select the right plan for your situation and investment goals.
There are several factors that need to be considered when selecting a plan, including:
- The type(s) of retirement account(s) that will be transferred to a self-directed plan
- Do the accounts belong to an individual or to husband and wife
- The type of investments the plan will be used for
- Where investments will take place
- The participant(s) age and employment situation
- Are new contributions into the plan going to be made
- The level of administrative responsibility you are willing to take on
- Estate planning considerations
- Investment exit strategy
There is no one size fits all solution, and even within a single plan type, there are different considerations that will need to be addressed for investors with different individual circumstances.
The best way to identify the right path for you is to speak with experts in the field, and not just self-directed IRA providers, but also those with expertise in the type of investing you want to do and with regards to your big picture financial goals.
This blog post will outline of the various plans available that might help point you in the right direction.
Self-Directed IRA Custodian
There are several trust companies that offer IRA accounts with the ability to hold non-traditional assets such as real estate, private placements, precious metals and other investments not available through traditional brokerage houses.
With a self-directed IRA provided by such custodians, the institution will hold the funds and engage in all transactions for the benefit of your IRA. That means that every transaction requires you to send paperwork to the custodian who will then review the paperwork to ensure it is complete before processing the transaction such as funding a purchase or maintenance expense, or accepting receipt of income. Of course, this processing takes time and there is either a cost for every transaction or fees based on the number of assets held or dollar value of the account, or some combination of these factors.
Because of this “middleman” business model, investing with a self-directed IRA account held by a custodian is best suited for a portfolio with minimal transaction activity, and where timely reaction for opportunity or emergency is not required. A custodial IRA is well suited for investing in private placements, mid-to-long-term trust deeds or mortgages, raw land and other more static asset types. Even with these types of investments, an investor intending to engage in several such transactions or working with a large sum of capital might find greater efficiency with a plan that offers checkbook control.
Keep in mind that an IRA custodian is prohibited by rule from offering tax, legal or investment advice. Their role when processing transactions is not to ensure you are in compliance with IRS rules or perform diligence on the investment you are making, but rather simply to faithfully document and execute the transaction.
Note that Safeguard Advisors is not a custodian and does not offer this type of account.
Checkbook IRA LLC
A Checkbook IRA LLC is an enhancement to a custodial self-directed IRA that puts the administrative control in your hands. An IRA account is established with a self-directed IRA custodian, and that IRA will then make a single investment into the ownership of a special purpose limited liability company. While the LLC is owned by the IRA and therefore subject to the same rules and entitled to the same tax-preferred status as the IRA itself, you as the IRA account holder can serve as the manager of the LLC and therefore have signing authority on behalf of the entity. You will establish a business checking and/or brokerage account in the name of the LLC and that is where the IRA capital will be deployed from.
The primary advantage of this arrangement is that you have direct control over investment activities and do not need to go through a 3rd party in order to purchase an asset for the IRA, deal with a maintenance expense, or receive income from the investments. All these transactions take place through the LLC and do not involve the IRA custodian.
For time sensitive investments such as tax lien or foreclosure auctions, this ability to act immediately is critically important. There is also great benefit when it comes to investing in more complex and interactive assets such as rental property where there is a constant need for expense and income transactions related to property taxes, insurance, HOA fees, maintenance and monthly rents. Eliminating the custodial processing delays and transaction fees not only increases efficiency and reduces overall costs, but can also prove critical when dealing with unexpected emergencies. Do you know a plumber that will come out immediately on a weekend but be willing to wait 5-7 days to get a check from your IRA custodian?
Of course, all this flexibility comes with responsibility. As the IRA account holder and manager of the LLC, it is your obligation to ensure you are acting in accordance with the IRS guidelines. This is also true with a custodian managed account, of course, but is magnified somewhat when you hold the checkbook.
Any type of IRA account can be used, including traditional tax-deferred IRA’s, Roth IRA’s, SEP and SIMPLE IRA’s, or even an inherited IRA.
Because IRA accounts are individual in nature, the IRA LLC best suited for a single investor with a single type of IRA. Combining funds of a husband and wife, or funds in traditional and Roth IRA accounts is not easily accomplished, though it can be done.
The next blog post in our two part series will focus on the solo 401(k) and business funding IRA plans. Be sure to check back for the next article that will share valuable information for choosing the right self-directed retirement plan for you.