Advantages of a SDIRA LLC or Trust

Whether you choose a self-directed IRA LLC or IRA Trust,  you will have the freedom and flexibility to invest as you see fit. While there must be strict compliance with IRS regulations, you now have the freedom to invest in assets that make sense to you vs. being limited by what brokerage firms permit you to invest in. Here are some of the benefits you will have with either structure. 


1. Checkbook Control of your IRA;

2. Reduced Custodian Fees & Oversight;

3. Asset Diversity;

4. The Family IRA; and,

5. Minimal Reporting


 

“Checkbook Control”


You have heard it said that “time is money”. Never has that been more true than with investing. When a good real estate deal comes along, you can not afford to take weeks to act. 


With a typical bank or brokerage IRA it can take a few days to a few weeks before you receive a check out of your IRA. Why? After all, it is your money that you are requesting. At PGI, we will help you with the simple yet effective steps of establishing Checkbook Control over your retirement funds. Once completed, you can simply write a check when you have the opportunity to grab a great investment. What could be simpler than that? 


Also, be very mindful of IRS Prohibited Transaction regulations.  Remember the old beer commercial that said, "With great freedom comes great responsibility"? This is also very true with your IRA and the IRA being responsible for following the rules.  Take control, yes. Follow the rules, yes. Retire prosperously, we all certainly hope so!  


The “checkbook control” feature provides you the freedom and flexibility to invest as you wish. Enjoy your investing, be prosperous, and comply with the rules!



Reduced Custodian Fees & Oversight 


Under IRA law, unlike the requirements for a Trustee-directed Solo-K, your IRA must be held through an IRS-approved custodian. These custodians are “passive” in nature, meaning they fulfill their responsibilities as the custodian, but do not offer investments. As a result, they charge annual fees for serving as the custodian of your IRA. Typically, you will be responsible for fees that range from account balance fees, asset fees, transaction fees, etc. Yes, it goes without saying that you can get “fee’ed” to death. At the bottom of this page is an example of a typical IRA custodian fee (without having an IRA LLC or IRA Trust) vs. an IRA custodian fee with either the IRA LLC or IRA Trust structure.


In contrast, a passive custodian that permits the IRA LLC or IRA Trust structure is less involved in the administration and oversight of the IRA’s investments. This is because the IRA funds are being capitalized into the LLC or Trust. You, as either the manager of the IRA LLC or Trustee of the IRA Trust, now assume that administrative function. All this means for you…the less involvement the custodian has usually meant cost savings to you with their custodian fees.


In almost all cases, the IRA account owner will save on custodian fees over the long haul. Initially, the IRA account owner will expend more funds with the set-up of the IRA LLC or IRA Trust; however, they will save money in custodian fees over time. And, have more direct control of their investing through the IRA LLC or IRA Trust process.


Asset Diversity 


Of course, an IRA LLC can invest into any asset not prohibited under IRS Prohibited Transactions. However, by having the LLC or Trust, the investment world is at your fingertips, and no waiting on the IRA custodian to process your request. 


The Family IRA 


With the IRA LLC structure, one is permitted to form a Family IRA LLC. The Family IRA LLC permits an LLC structure to be established that can accept two members (i.e., two IRAs). This is common in spouse/spouse IRAs where the spouses wish to combine their IRAs into one LLC for greater investment power and ability.


Of course, there are rules. What rules must you adhere to in this structure:

  1. Proportional/Percentage Ownership — When creating, the two IRAs holding membership will be assigned a percentage of ownership based on the capitalization from their respective IRAs. Once established, these percentages cannot change until dissolution of the IRA LLC.
  2. Partnership Tax Return — The IRS tax rules requires any multi-member LLC (two or more members) to file a partnership tax return. Generally speaking, no taxes would ever be due (unless UBIT or UDFI was triggered), but a partnership return would still need to be filed with the IRS.


The Family IRA can be used when the desired investment is too large for your IRA to purchase alone. In the below illustration, Bill and Sue use their IRAs to buy a prorated interest in a third LLC. Then that third LLC purchases the property. In this strategy as in all investment strategies, structure and adherence to the IRS rules is of the utmost importance.

 


Minimal Reporting 


There are minimal reporting requirements when you establish an LLC inside of your IRA, since the LLC is by definition a “pass-through entity”. This means that all of the LLC’s gains and losses pass-through to its owner; in this case, the tax-deferred entity of the IRA. The tax-deferred structure of the IRA usually prevents current taxation.
 



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IRA Custodian vs. IRA LLC or IRA Trust Fee Structures

#1 Example/Assumptions

#3 Custodian/Professional Fee with an IRA LLC

#2 Custodian Fees/No IRA LLC or IRA Trust

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For this comparison, the comparisons between the IRA Custodian (only) and IRA LLC are based on the following assumptions:


  • An IRA custodian whose fees are not the lowest or highest
  • An IRA account balance of $150,000
  • An IRA being self-directed for 5 years
  • For the IRA LLC comparison, we will use a common LLC formation fee ($100), with a $25 annual fee
  • For the IRA LLC, we will use a one-time IRA LLC professional fee of $800
  • For the IRA Trust, we will use a one-time IRA Trust professional fee of $1,400.

Next: #2 Custodian Fees/No IRA LLC or IRA Trust

#2 Custodian Fees/No IRA LLC or IRA Trust

#3 Custodian/Professional Fee with an IRA LLC

#2 Custodian Fees/No IRA LLC or IRA Trust

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No IRA LLC or IRA Trust will generally lead to higher custodian fees. The reason being is that the custodian is "touching" your IRA account every time they perform a transaction for the IRA. In this assumption (#1), the IRA account owner would be subject to:


  • $600 in annual fees (minimum); which would result in,
  • $3,000 in fees over a 5 year period of time.

Next: Custodian/Professional Fee with an IRA LLC

#3 Custodian/Professional Fee with an IRA LLC

#3 Custodian/Professional Fee with an IRA LLC

#4 Custodian/Professional Fee with an IRA Trust

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An IRA LLC will generally lead to a lower amount of annual fees compared to a custodian-controlled IRA. In this assumption (#1), the IRA account owner would be subject to the following fees:


  • $125 in annual IRA custodian fees;
  • $100 for the establishment of the hypothetical LLC
  • $100 in annual fees paid to the respective state for the LLC ($100 total over years 2 - 5)
  • $800 one-time professional fee for the establishment of the IRA LLC


Total Approximate 5-year Costs

$1,625


Next: Custodian/Professional Fee with an IRA Trust

#4 Custodian/Professional Fee with an IRA Trust

#4 Custodian/Professional Fee with an IRA Trust

#4 Custodian/Professional Fee with an IRA Trust

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While there are many benefits of the IRA Trust, most people who elect the Trust do so because they live in a high-cost LLC state, making the IRA LLC not as attractive. 


Since the Trust is not an LLC, there are no LLC filing or annual fees to be concerned with. With the same assumptions being made for the IRA Trust, the IRA account owner would be subject to the following fees:


  • $200 in annual IRA custodian fees;
  • $1,400 one-time professional fee for the legal construct of the IRA Trust

Total Approximate 5-Year Costs

$2,400


Next: Save Fees & More Control?

#5 Save Fees & More Control?

#4 Custodian/Professional Fee with an IRA Trust

#6 IRA Custodian/IRA LLC/IRA Trust

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Most people would assume that by establishing an IRA LLC or IRA Trust, they would actually incur higher expenses...and, in some cases, they might.


While dependent on many factors (IRA custodian fees, State fees, professional fees), the typical IRA account owner will save in fees with the IRA LLC or IRA Trust structure...with the passage of time. 


However, the primary purpose why most people establish the IRA LLC or IRA Trust is to have greater control of their investments vs. saving in fees. 


What's wrong with potentially having both?


Next: IRA Custodian/IRA LLC/IRA Trust

#6 IRA Custodian/IRA LLC/IRA Trust

#4 Custodian/Professional Fee with an IRA Trust

#6 IRA Custodian/IRA LLC/IRA Trust

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Compare and contrast the differences between the IRA custodial account, IRA LLC and IRA Trust.