If you are looking for total control of your IRA investments and are tired of
having to refer decisions over investment strategies to unimaginative advisors
who tie your hands behind your back when it comes to making investment choices,
or who are simply limited to his or her company's range of products or
investment policies, and of custodians who over-stringently interpret IRS
investment regulations, then a self directed IRA is for you.
But if you want a truly self
directed IRA and don't want to be bound into traditional investment choices
or limited in your ability to invest your money as you see fit when you see fit
you need to take a step further. Then you should be looking at setting up a self
directed IRA LLC. In other words, you become in effect the director of a limited
company responsible for building your own IRA.
The advantages of this move are immediate and obvious -
Since you effectively become the custodian of the IRA, you will no longer
have to pay transaction costs for every move you make with your self directed
IRA LLC.
Since you control and handle all the transactions, the custodian for our IRA
can be paid a flat annual fee. You can benefit from the lowest IRA custodian
fees in the market. It does not matter if you have one million dollars in your
IRA or one billion. Your custodial fees are fixed.
You have absolute decision making power - no ifs, no buts, no maybes; you do
not have to ask permission of anyone else, you are the decision maker. It really
is a truly self directed IRA.
A truly self directed IRA plan can be used as funding for a down-payment for
a real estate purchase.
Because it is set up as a limited liability company (LLC), your self directed
IRA assets are protected from creditors and litigators. Without the LLC, your
retirement funds could be directly exposed to a frivolous lawsuit.
Investment Variety
You can benefit from massively extended range of investment choices; of
course, you can still choose to invest in the traditional choices of stocks and
mutual funds, but other choices include real estate, tax liens, tax deeds,
options - any legitimate business investment opportunity that doesn't breach IRS
rules (which is most of them)
Having such a wide range of choices enables you to diversify your holding;
essentially, you reduce your risks by spreading your investments over several
choices (the opposite of putting all your eggs in one basket)
You can invest in international or foreign real estate in such places as
Costa Rica with your IRA - LLC without asking for your custodian's
permission.
Finally, moving to an IRA LLC is an affordable choice for almost everyone; it
is estimated that it is less than a half of the cost of having an IRA
facilitator
In short, your self directed IRA LLC is a truly self directed IRA because it
maximizes your ability to control how your IRA is invested. You are no longer
limited by other's choices, investment options or company policies. It is your
IRA, your way.
But, as with everything in life, there is a downside - at least,
potentially.
I have already hinted that traditional financial advisors are not best placed
to give advice on other kinds of business investment such as real estate. They
will have a good understanding of stocks and shares. Would you ask your dentist
to do an angioplasty? By the same token, a traditional advisor will not know how
to leverage the best deals in real estate or in other kinds of business
investment.
It is important therefore that you choose an IRA advisor who can help you
structure complex IRA and real estate entities, evaluate investment
opportunities and avoid infringing on the self directed IRA rules in setting up
investments.
Consequences of setting up your IRA-LLC incorrectly: "Internal Revenue
Service could step in and simply disqualify the IRA, resulting in huge tax bills
along with additional penalties for account holders who are younger than age
59˝. A lot of people are going to get themselves in trouble and wind up losing
their IRAs over this," says Ed Slott, an IRA consultant." (Wall Street Journal,
You Did What With Your IRA?, author Kelley Greene, October 15, 2005).
Investing in a single property is no more difficult than buying your own
home. Where real estate deals become complex is when you are seeking to fund
developments, real estate lots, buying into apartment communities or other
larger scale investments. This is where extensive knowledge of self directed IRA
rules is paramount. Only someone with a strong background in real estate can
supply these skills.
Rehabilitating residential real estate is a good example of where things can
go wrong - badly. How can you tell a genuine opportunity from a poor deal? How
do you know how much to invest in rehabilitating a property? Too often, people
with little experience in the area spend over the odds on a property and fail to
realize a return on their investment. Effectively, they pour money down the
drain.
As well as a lack of familiarity with the business, without a solid knowledge
of self directed IRA investment regulations, you could end up facing stiff
penalties (up to 10 % plus taxes) or even disqualify your retirement altogether.
As much as 50% of your IRA could disappear due to an unintentional
violation.
Basically, once you set-up your IRA-LLC correctly, it comes down to being
careful of whom your IRA does business with and who benefits.
You as the IRA owner cannot live in an investment owned by the IRA.
You cannot directly or indirectly buy, sell, or lease property between the
IRA and a disqualified party except in cases where this is exempted.
Your IRA is not allowed to transaction business with your spouse, lineal
descendants or their spouses (i.e. your grandparents, children, grandchildren,
son-in-law, daughter-in-law, step-children) as they are considered disqualified
persons. However, you can do business with your brother or sister, their
spouses, nieces, nephews, cousins, aunts or uncles, which are relatives more
distantly related to the IRA account. For example, if your IRA purchased a
holiday home, your brother and his family could stay there for a holiday, but
you could not.
You cannot take real estate property you already own or occupy and stuff it
in your IRA, even if you sell the properties to the IRA at fair market value
(FMV). If you have to liquidate a portion of the IRA's ownership in the property
at the time of required minimum distributions - 70 ˝ in order to remain IRS
compliant - you can do so incrementally. In doing so, the portion that is sold
off can be taken as an IRA distribution.
You cannot extend personal credit to your IRA. For example, if wanted to use
your IRA as a down payment on an investment property, then you could not
personally acquire a loan in your name, take title to a property owned by your
IRA. However, there are financing strategies that combine debt financing and
your IRA and there are competent lenders who understand the IRA - LLC.
Investing in collectibles is a no-no. You cannot invest in artwork, antiques,
rugs or a purchase a 10 carat marquise diamond ring for your spouse or your
fiancé and pass it of as an investment.
Real Estate Financing and your IRA
Where you use a non-recourse loan to help purchase your investment because
you do not have enough money in your IRA to do so, you may also face a tax known
as Unrelated Debt Financing. But this can be mitigated through long term
property holding where your use the property as a rental and the debt goes down.
If you are terribly concerned with UBIT, then partnering with another IRA holder
or a non-disqualified party who puts up the remaining cash could be the best way
to eliminate UBIT all together. To learn more about pooling IRA holders together
for larger real estate deals visit href="http://www.GroupDominion.com">http://www.GroupDominion.com.
In order to defer UBIT you can decide to 1031 exchange the UBIT part of the
transaction forward to another investment property and by doing so reap the
benefits of both worlds: receive tax deferment through the 1031 exchange on the
indebted portion and tax deferred benefits on the gain in the self directed IRA
when you decide to exchange the property.
In addition, because the IRA is already a tax favorable vehicle, your IRA
cannot receive additional tax deductions or depreciation as you would if it was
your own home.
Picking the Right Self Directed IRA Advisor
With the assistance of a competent self directed IRA advisor, you can
petition the IRS successfully and structure your real estate transactions so
that you can make your real estate purchase outside the IRA. By doing so,
prohibited transactions go away, UBIT goes away; you can receive personal
benefit from the investment property, take title personally to an investment
property without infringing on the rules and without facing stiff IRS penalties.
In short, there are cons as well as pros to using self directed IRA LLCs, but
choosing the right advisor will help you steer clear of the sandbanks.
