Hot Topic – Checkbook Control / IRA LLC

I work in the field of Self Directed IRAs & 401(k)s. Based on the phone calls and emails we receive, by far the most discussed topic is checkbook control. Some people want it; others don’t. Some service providers support it; others discourage it.

What is it?

What most people are referring to when they say checkbook control is an investment structure that is formed as follows:

  1. A person opens an IRA account at a self directed custodian and transfers other retirement account funds into it.
  2. The accountholder has a Special Purpose LLC created and names themselves as LLC manager.
  3. The accountholder directs their custodian to invest some or all of the IRA funds into the newly created LLC.
  4. The LLC further invests its funds, often into real estate, private companies, or mortgage notes. The LLC is owned by the IRA, but managed by the IRA accountholder. Because the manager is the authorized signor on all LLC accounts, this is known as checkbook control.

The legitimacy of this structure was verified in a tax court decision.

Why would somebody WANT checkbook control?

  • Eliminate transaction based custodian fees
  • No delay for custodian to process the transaction
  • Remove custodian’s prohibition on certain legally allowable investments
  • Invest in stock market with margin
  • Invest in foreign assets with more ease

Why would somebody NOT want checkbook control?

Here’s where the confusion and disagreement occurs. The argument against checkbook control is based on compliance, mostly with prohibited transactions, which in a nutshell are “self dealing” transactions. Self dealing means the accountholder causing the retirement account to buy, sell, or otherwise enter into a transaction with a disqualified person. This category of people includes the accountholder, most of his relatives, and anyone who provides services to the retirement account. So the argument goes like this:

“Prohibited transactions are costly. Without a custodian overseeing your transactions, you are at higher risk of doing a prohibited transaction and paying large tax penalties as a consequence.”

I always do my best to maintain an objective, balanced viewpoint. In light of the above argument, I formed the opinion that it’s good for some people to have checkbook control and risky for others. Therefore, whether checkbook control is appropriate is dependent on the circumstances of the accountholder. I operated under this thinking for over a year…

Then I learned more about the actual matter at hand.

… and have come to a completely different conclusion. Here are the newly discovered facts:

  1. A custodian cannot advise you on whether a proposed transaction is compliant. It is a legal matter, and only an attorney can give you legal information that you can act and rely upon.
  2. A custodian will not allow you to open an account unless you hold them harmless for their guidance and actions relating to prohibited transactions and legal compliance.
  3. In every retirement account, the person solely responsible for prohibited transaction compliance is the decision maker (aka fiduciary – the one who has discretion over how plan assets are invested). A custodian is not a fiduciary. You make the decision, they only follow through with them.
  4. In the event of a prohibited transaction in a self directed account, the accountholder will suffer the consequences regardless of whether they had checkbook control.

Okay, so all in all, #4 is what’s important. The idea here is that transacting without checkbook control does not take you off the hook in terms of PTs.

It is easy to know if there is PT risk

Determining whether a proposed transaction is actually a PT is hard. But determining whether something might be a PT is easy. Here’s the 3 step process:

  1. Make a list of disqualified persons. This list should include your spouse, ancestors, lineal descendants (children, grandchildren, etc), and spouses of lineal descendants. Also include anyone who provides services to your retirement plan.
  2. If a proposed transaction involves (or is expected to involve in the future) a person on the DQP list in any way, stop. It might be a PT. Either don’t do the transaction or get help before proceeding.
  3. Seriously, don’t proceed without help.

It’s important to note that “involves in any way” (from #2 above) includes involvement of an LLC, trust, corporation or any other entity that has a DQP as part or whole owner, director, officer, employee, etc. PTs also include any scheme that intends to use plan assets to benefit a DQP even if indirectly.

If you can’t follow that 3 step process, you shouldn’t have a self directed account regardless of checkbook control because the risks are the same. If you are at risk of paying absolutely no attention to PT rules, then a custodian’s “we’ll keep you safe” vow doesn’t jive with their account terms and conditions, and you’ll be paying the price of your naivety if they overlook a PT.

Again, it’s easy to determine PT risk. If there’s a potential PT, only an attorney can give you definitive, binding advice. Your risk is absolutely identical with or without checkbook control: It’s your risk and your responsibility.

Are there any other reasons to want to transact at the custodial level?

The only other possible benefit of transacting at the custodial level is bookkeeping. If you can’t balance a checkbook or put bank statements, contracts, and settlements statements in a file folder… then you will have problems keeping your LLC’s books. Then again, if you don’t understand basic recordkeeping, you shouldn’t be a self directed investor yet, now should you?

What about FDIC insurace?

I’ve noticed FDIC insurance is a frequent component of this topic as well. IRAs have $250,000 of coverage while regular bank accounts have $100,000 of coverage. This should be of no consequence:

  • With free checking, why not open multiple bank accounts for LLC cash reserves of over $100,000?
  • When’s the last time you used your FDIC insurance coverage?
  • It only kicks in during a banking disaster. If there’s a banking disaster, U.S. Dollars may become entirely worthless. Here, the FDIC might as well be giving you Monopoly money.
  • The currency is already declining; you shouldn’t have more than $100,000 wasting away from currency debasement anyways.

What about extra tax returns?

Checkbook control makes use of a single member LLC which the IRS disregards for tax purposes. In other words, there is no tax return required. If your IRA or LLC were to invest into a multiple member LLC partnership, a 1065 partnership return needs to be filed, but this is the case with or without checkbook control. Checkbook control creates no unique additional filing requirements.

Back to the big picture for risk of PT noncompliance:

If you pay no attention to PT rules and you transact at the custodial level, you are at high risk.

If you pay no attention to PT rules and you transact with checkbook control, you are at high risk.

If you follow the simple 3 step PT risk determination process described above and you transact at the custodial level, you are at low risk.

If you follow the simple 3 step PT risk determination process described above with checkbook control, you are at low risk.

If you do a PT at the custodial level, you pay the consequences.

If you do a PT with checkbook control, you pay the consequences.

You see, when you really break it down, there is actually no substance to the anti-checkbook-control argument.

But I’ve heard that the government is about to prohibit checkbook control?!

I dare you to find an official written source of this claim. I’ll give you a hint, your best chance is in the magazines you look at while waiting in line at the supermarket.

If you think that government prohibition of checkbook control is actually likely, consider that 401(k) plans (in fact all qualified plans) have never had a custodian requirement in the first place. That’s 27 years of checkbook control with no sign of change. Really think about this for a second. The government allows you to prepare your own tax return. You can lie and cheat on it if you are stupid enough. Outlawing checkbook control of retirement accounts is on par with outlawing self prepared tax returns.

So, get the facts and make your own choice. If you still think it’s best to transact at the custodial level, then that’s fine. Hey, millions of people still think it’s best to invest mostly in mutual funds and the world still turns.

Don’t get too tripped up on account structuring. Get the facts, make your decision and move on to the fun part: finding and making the investments.

Reader Interactions

Comments

  1. Sure – the IRA accountholder makes contributions to their IRA. The IRA then, as sole owner/member of the LLC, makes capital contributions to the LLC.

    Contributions
    Accountholder –> IRA –> LLC

    Distributions to Accountholder
    LLC –> IRA –> Accountholder
    (accountholder pays ordinary income taxes on distributed amount unless it’s a Roth)

    Distributions to IRA only
    LLC –> IRA
    (no distribution/income taxes due)

  2. Are you allowed to have a multiple member LLC? For example both my wife and I create a single LLC and our IRAs make capital contributions to the LLC (in order to save corporate taxes).

  3. Craig,

    An IRA can invest in a multiple member LLC. The potential issues are:

    1. Securities – Membership units in a multiple member LLC could be securities. Depending on who else is in the LLC, you may have issues. See post “Eliminating Securities Problems – Part 1

    2. Prohibited Transactions – If the other LLC partners are disqualified persons, certain actions may create a prohibited transaction. This gets slightly complex, I’ll be adding a post soon about it.

    You mention saving on corporate taxes. Are you in a state that has high LLC taxes? Also think about the location of the assets you plan to purchase.

    Example: Jon lives in an expensive registration state (such as California), but he plans on using his IRA LLC to purchase real estate in Georgia. The ownership of real estate in GA creates “nexus” and requires the LLC to be registered there. He can either:

    Option A – Initially register his IRA’s LLC in CA (about $800 up front and each year thereafter) and then register that same LLC in GA as a foreign LLC (foreign meaning CA) for about $225. So a total cost of about $1025 up front and at least $800 per year.

    Option B – Register his IRA’s LLC directly in GA for about $30.

    ——–
    It’s always best to stay away from potential prohibited transactions. For that reason, if we setup your IRA LLC, I’d be willing to significantly discount your wife’s IRA LLC. Then you both could separately (and compliantly) invest using the concepts I talked about in the post “Eliminating Securities Problems – Part 2“.

  4. Jeff,
    It’s hard to believe the IRS does not require a tax return of some type for the LLC. Usually, an LLC being a disregared entity created by an individual, the income from the LLC is reported on a 1040. SO, if I understand what you are saying, no year end reports are required, except the custodian filing the IRA FMV at year end? How does the LLC fill out the SS4 to get an EIN?

  5. I am a California Real Estate Broker who plans to open a Self Directed IRA LLC for myself with the intention of purchasing residential real estate. I will take no commissions or accept any property management fees in conjuction with this property. Will this, in your opinion, avoid a possible PT.

  6. If I create a special-purpose LLC and fund it with my IRA, can my parents and siblings invest in the LLC without creating a PT or potential PT? We plan to use the LLC to invest in real estate and other things, but the investments are not with each other.

  7. jeff,
    i have recently changed jobs ad have about 140000 in a 403b,i would like to put that money in a check book IRA and use to help my sister who has a special needs child and needs to build an addition to her hous to this effect. i would like to loan her themoney at a relatively low interest rate ,can i do this??? She is not a DQ person but i didnt know if a loan like this without some kind of collateral and just a promissory note was possible.I know she is good for it and this would be a good investment for my money .

  8. Joel,

    I think your proposed loan would be a prohibited transaction. Even though she isn’t technically a DQP, she’s obviously your close family. Loaning her money at a low rate of interest would probably be construed as you using the plan assets in your own interest (because you care about your sister and want to help her).

    What’s the amount of the loan? Do you have any self employment activity?

    If you’re eligible for a Solo 401k, you could borrow up to $50k from your plan and then personally loan it to her. Learn more here.

  9. I’m having trouble finding IRA custodians with low costs for a check book controlled LLC. I’m interested in buying tax liens and paying individual and annual costs for low cost transactions is cost prohibited. Would you provide a list of custodians specifically for a checkbook controlled LLC IRA?

  10. It’s hard to provide a list because most custodians can’t make up their mind about IRA LLCs. For many of them, one week they allow it, the next week they don’t.

    My company is the only firm in existence who obtained an authorized licensed to use the document system from the attorney who created the special purpose IRA LLC. Our preferred custodian is Sunwest Trust because they never disallow legally allowable transactions based on company policy, and their fee schedule is nominal for the LLC – $190 per year. When you create an IRA LLC with my company, all you have to do is complete a 15 minute telephone application that includes all of the IRA paperwork.

    Jeff

  11. This is similar to a question above. I am considering investing my IRA into a multi family rental property which I would like to manage myself. If I don’t take a managment fee am I still creating a prohibited transaction? The reason I ask is that I read someplace that you can’t put sweat equity into the property (i.e. fix the roof myself) because it would be an illegal contribution to the IRA. Wouldn’t managing the property be a form of sweat equty?

    A related question. If I form an LLC with 3 friends and we each invest 25% into the same property, can I take a management fee for managing their share of the property without createing a PT?

    Last question. I’m a Realtor. If my office takes a commission on the purchase is this a PT? (the seller pays the commission)

    Thanks

  12. I remain unsure, it seems that in two places above you stated that being paid to manage ira assets would be PT. Yet in the body of the blog post above you suggested that with an ira llc you COULD manage and be paid a reasonable fee.

    They seem contradictory, but I’m sure I just dont understand yet.

    I am interested in moving on this very very quickly, so your response is eagerly awaited.

    Thanks
    Robert

  13. Dear Jeff,
    Do I need to file a 1065 tax form an LLC whose members are 3 Roth IRAs? If not do I file anything? K-1s?

    If I cannot have the LLC address be the same as my residence, can I use a PO Box for the LLC?

  14. Any time there is multiple members of an LLC, it is taxed as a partnership unless you made a specific election to be taxed as a corporation.

    A partnership must file a 1065 return and each member/partner should receive a K-1 for their share of the profits or losses.

    Using your address for the IRA LLC shouldn’t be an issue as it does not convey any benefits to any disqualified persons.

  15. Nothing seems to be easier than seeing someone whom you can help but not helping.
    I suggest we start giving it a try. Give love to the ones that need it.
    God will appreciate it.

  16. If A ira with checkbbok control buys foreign property and has to set up a foreign LLC in order to do so, does the manager have to fill ,out form irs form 5471 . Foreign controled corp along with his personal tax return? The LLC then purcahses the shares of an SA [ which is essence is the property]

  17. Dear Jeff,
    For an LLC whose members are 3 Roth IRAs, can I add annual contributions from the 3 accounts at the custodian? Is it ok if not all three members contribute and the percentage ownership of the LLC changes?

  18. Hi Jeff,

    I’m a little confused on why you believe that lending money from an IRA to a sibling might be a prohibited transaction. I understand the closeness of the situation makes it appear to be a precarious transaction, but since they are not a DP it doesn’t seem that a loan or other investments with the IRA would be prohibited.

  19. IRC 4975(c)(1)(E) prohibits any direct or indirect act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account.

    It’s not an open and shut case that lending to a sibling is always a prohibited transaction. But this section of the tax code says that anything in your own interests is a prohibited transaction. It’s a tough argument to defend that lending money to your brother or sister isn’t in your own interests. They are your family, you love them, and it is in your interests. That would be the argument of the IRS in tax court, and I would not want to be opposed to it. Every scenario is unique, and some might carry better defense arguments, but generally I discourage plan loans to siblings. I like being better safe than sorry.

    Again, with endless investment opportunities out there, my perspective says don’t risk anything that is in the general realm of what the IRS prohibits, and focus on investment transactions that only benefit the plan.

  20. @ Kristin – Making member contributions disproportionate to existing ownership could be okay if each of the accountholders aren’t disqualified persons to either of the other 2 plans.

  21. my wife and i each have several iras, 401ks, tsas and profit sharings from former employers. we would like to roll them all over and self direct them. do we have to have a separate ira for each or can they all be rolled over into one new ira? in turn, in either event of multiple or one ira, can they be moved to a 2-member llc with the members, of course, being my wife and myself?

  22. I was recently speaking with someone about self directed IRA’s and they brought up something that was “new” and was not in-line with what is floating around the Internet. It is regarding self directed IRA LLC’s. In the past, I learned that the custodial account (the IRA), can be 100% owner of the LLC and sole member. Now, I was told the IRS is stressing to have the IRA own no more than 49.5%. Did you hear anything about this?

  23. Various people and/or companies have been making up “What the IRS is thinking and doing about IRA LLCs” for several years. None of it is founded in any actual events or communications.

    The issue is what is and isn’t a prohibited transaction. Prohibited transactions are governed by the Department of Labor rather than the IRS. DOL has issued their opinion numerous times and consistently: an IRA LLC being formed and used for investment does not, in and of itself, create a prohibited transaction regardless of how much of the LLC is owned by the IRA.

  24. Thanks for your reply. I have 2 IRA LLC’s, fiancee has 1 IRA LLC, mom has 1 Single Member LLC, and I have Individual 401k (Profit Sharing & Roth) for a total of 6 accounts. I would like to create a new LLC as a “holding” company and each of these already established entities would be the new forming members of this new LLC. Me and my fiancee would be the operating managers of this new LLC. Do you forsee any problem for a prohibited transaction or disqualified person being involved in the wrong way with this new LLC?

  25. JP,

    The most accurate and brief answer is yes & no. It is outside the scope of a blog comment conversation. Please call my office at 877-903-2220 for a more elaborate approach to assistance.

    Jeff

  26. Could you please clarify for me:

    If an investment group/club forms an LLC and several members are IRA LLCs, how can a 1065 be filed for the investment club LLC and K-1’s be filed/given for the IRA LLCs unless the IRA LLCs apply for Tax IDs?

  27. How do I file a 1065 for an LLC that has 4 IRAs? 2 are Roth IRAs owned by my husband and myself, and 2 are SEP IRAs owned by each of us. I can only get one EIN number for 1 IRA for each of us. The IRS doesn’t allow me to get a second EIN for more than one IRA in my own name. Secondly, my state (Tennessee) does not recognize partnerships or LLCs and treats them like a corp. How do I avoid paying income tax on the income of the LLC?

  28. Lori,

    You should be able to file the 1065 like you would with any partnership. If some of the partners have the same EIN, it might not matter (at least for the federal returns) since the IRAs themselves wouldn’t normally file a tax return that includes the K-1 anyways. I can’t comment on any laws or regs for the state of Tennessee. You should definitely run all of this by your CPA.

    Jeff

  29. Can you make any referrals to a CPA in Tennessee who is familiar with these LLCs? I am having trouble finding one who knows anything about self directed IRA’s and the LLCs associated with them.

  30. Jeff,

    Let’s say I open a business as a sole propreitor and operate it for 1-2 years. For legitimate reasons I have to close shop. Can I keep my Solo 401(K) account and manage it until retirement (perform rollovers for example) ? It would be fine if I could not make any additional contribution.

    Thanks,

    Andras

  31. Jeff,
    we are considering using Guident to set up a Self Directed IRA and LLC for us. They tell us they will use Trust America as the Custodian. We cannot locate Trust America on the IRS approved list of Custodians. We would appreciate any comments you can provide.

  32. Kamau,

    The 3 ways a company can serve as custodian are to be either:

    1. A bank,
    2. A trust company, or
    3. Specifically approved by IRS

    Trust America is probably #2. If so, it wouldn’t need to be #3. Usually to include the word “trust” as a separate word in the name of company requires them to be a registered trust company.

    On the other hand, there may be another item of concern. My company, Nabers Group, is the only company in existence who has received a license for the IRA LLC document system from its creator, Debra Buchanan. I worked personally with Debra and government officials to improve the compliance of our IRA LLC document system, and all of the companies who use Debra’s original documents without authorization have not received the numerous document updates. I’ve been told by Debra that Guidant uses her IRA LLC documents without authorization. Frankly, I don’t know the details of their law suit, but I’m sharing with you what I’ve been told.

    Secondly, I am concerned about the recent happenings over at Guidant. Their main product, a 401k business funding structure, appears to be a setup that helps people intentionally do a prohibited transaction in the hopes that they are covered by a certain exemption. A few weeks ago Guidant suspended sales of that product due to regulatory concerns. A couple of weeks later, they relaunched the product. I haven’t talked to the Guidant guys in a while, but that activity certainly raises some questions.

    If you are looking for the IRA LLC, my company has the most developed and compliant solutions out there because we are the only company who has the license form the creator of the IRA LLC. You can get more info by calling my office at 877-903-2220.

  33. Jeff,

    I am starting an IRA LLC in Nevada but I live in CA. My investment property is also in CA. I am hearing that the LLC should be in the same state that the property is in to avoid any problems with the state of CA in the event of a lawsuit (either brought by me against a tenant or vice versa). Also, most banks require that the LLC checking acct be opened in the state where the LLC is registered. However, the physical address of the LLC can be my own CA address (or so I am told by the NV resident agent I hired) and thereby avoid the snag with the bank. Can you enlighten me?

    Thanks,
    Larry

  34. Here’s another one for you Jeff,

    I just read that the IRA custodian can be directed to fund the retirement plan in my own S-corporation which can then be used to invest in the company. I have a company (that I can convert to an S-corp) that charters sailboats. Could I purchase a sailboat to charter with these funds? If so, would it be a PT to also use the boat for personal use? (I assume living aboard would be a big no-no – right?)

    Larry

  35. Larry,

    In response to your first question, if you are primarily going to be buying real estate in CA, why do you aim to register the LLC in NV? Doing so will caust you to pay two sets worth of fees and/or taxes. You will have to pay fees to register the NV LLC, file annual reports in NV, and then register the same LLC as a foreign entity in CA and pay the $800+ franchise tax there.

    Owning real estate in California creates “nexus” and thus requires any corporate entity to register in CA.

    Second question response – If “you have a company” then your IRA cannot transact with that company without creating a prohibited transaction. Also, any personal use of any IRA-owned asset by a disqualified person (including you and most of your family) is a prohibited transaction.

    I recommend you refocus your ideas towards investment opportunities that don’t involve you or your companies on the other end of the transaction. There is a world of opportunities out there.

    Jeff

  36. Re: Mixed Info

    Conflicting information is common in this field; it’s the reason why I got into the field (to debunk the bad info and demystify these topics).

    It doesn’t matter what two different people think about this; it matters what the California government thinks about this, and they are greedy. California is one of the most tax-heavy states. And guess what? They think that real estate ownership creates nexus which means that when an LLC owns real estate in CA, it must be registered in CA & pay the $800 franchise tax.

    See this official CA document here.

    On page 2, it offers examples of “unprotected activities” (those that create nexus and require registration) and “protected activities” (those that do not create nexus or require registration).

    As you see, unprotected item 16(i) is ownership of real estate.

    You can believe your other source or you can believe the State of California.

    Also, if you were to invest your plan all over the country (into real estate), then yes you would need to register your LLC in every State in which you own property and in which the nexus laws are similar to CA. This doesn’t mean creating 50 different LLCs. It means creating 1 LLC and registering it as a foreign entity in the other 49 states.

    Larry

  37. Jeff,

    What do you know about the differences between an IRA LLC and a self-directed IRA Trust? I read that one gets the same liability protection in a Trust as an LLC but can avoid all the taxes, fees and the annual LLC report to the state where the LLC is located. Also, one can avoid registering the LLC as a foreign entity in states where the property is located if different from where the LLC is registered. The Trust also serves as the custodian. The Trust company that I just talked to charges $50 to set up the trust then an annual percentage of the value of the IRA ($440 for IRAs valued between $100,000 and $200,000). The trust seems like a better deal than an IRA LLC. What do you think?

    Larry

  38. Larry,

    My company registers LLCs in all 50 states. For a clarification of when an entity is a “foreign” entity, just call my office at 877-903-2220 and go through our assisted due diligence process. Your first phone call will probably take 8 to 10 minutes and it will get you on track to figuring things out.

    An IRA trust is interesting. An IRA is a trust in the first place so creating an IRA trust trust is sure to make the government think something fishy is going on.

    Most states have a statue that defines a business trust and subjects business trusts to the very same taxes they apply to LLCs. Any state that is overzealous in its taxing of LLCs will likely be overzealous in applying those same taxes to an IRA trust trust.

    What you’ve come across is clever marketing, but it probably won’t get you off the hook from paying franchise type taxes to state authorities.

    Again for more info and to get things sorted out call 877-903-2220.

    Jeff

  39. I read that one pt is that I can’t buy property I already own without an exemption…is that true? And if so, how do I get the exemption? I have a place that I’m trying to sell, but given the current market conditions, I thought I could just buy it myself.

  40. Anthony,

    You’re right; what you described would be a prohibited transaction. You can’t get an exemption.

    The Department of Labor gives exemptions sometimes for cases where a person wasn’t clear about whether their proposed transaction was prohibited. They’ll give an exemption when that proposed transaction isn’t in violation of the PT rules.

    It may seem unfortunate that you can’t use your IRA to buy a property from yourself for more than its real market price, but I think it’s fortunate. Hopefully, these rules will restore your attention to good, profitable investment moves you can make inside your tax-favored retirement account.

    Jeff

  41. Thank you for the reply, but I actually wanted to just buy it for what I owe, which is about 50% of what I paid for it. I wasn’t looking to make a profit off of it, just to get it out my name and into the IRA. I guess I will have to sell it and find something else.

    thanks again.

  42. Jeff, your site is very informative. Thank you.
    Three questions:
    (1) Would the creation of the IRA LLC for checkbook control trigger the UBIT mentioned in your other posts if the entity is a pass through such as a partnership? Since the IRA would own the LLC it seems that it might.

    (2) Can an IRA own a partial interest in a property along with other individuals or business entities?

    (3) Can an IRA own an interest in a limited partnership which holds real estate? Would this trigger any UBIT?

    I would appreciate any information you can provide on these topics, thank you.

  43. Janine,

    (1) No. UBIT isn’t triggered by a structure; it’s triggered by activity.

    (2) Yes

    (3) Yes. It depends on the activities of the partnership.

    The best way for you to get these topics more into focus is to call my office at 877-903-2220. All we do all day long is help people like you with your self-directed investing endeavors. 🙂

    Jeff

  44. Dear Jeff,
    I am so thankful to find your site It has provided such wonderful information! Here is my question, I live in Florida my mortgage was funded through a self directed IRA from California I find NO LLC in Florida It appears that usury laws may have been violated If the property is in Florida the IRA is in Calfornia which usury laws apply? Thanks Kris

  45. @ Kris. That is certainly a legal question. While I can often point people in the right direction to cut down on legal bills, for this type of question the first stop should probably be an attorney in FL.

    Jeff

  46. IS a california IRA LLC exempt from state franchise tax of $800.00
    How should one go about to get this exemption? If available.

  47. Hi Jeff,

    I am looking at doing several real estate deals around the country. My objective to isolate the liabilities of each individual project. Can I set up a “master” IRA LLC to have checkbook control, and then create an LLC for each individual real estate project (where each LLC is 100% owned by the “master” IRA LLC), or do I need to create a unique IRA LLC for each project? If an LLC owns another LLC, is that still considered a single member LLC situation (freeing me from the need to file tax returns)?

    Thanks in advance!

  48. Alex,

    Yes one LLC can own another. Any LLC is considered a single member LLC if there is only one member.

    Before setting everything up, I recommend you call my office to strengthen your due diligence. 877-903-2220.

    Jeff

  49. Jeff, I live in NC and want to setup an SDIRA with rollover funds from my 403. I am looking at a storefront in nearby SC which will be rented. The tenent may sublet all or part of the building. Where are the landmines?

  50. Hi Jeff – great website!

    I want to use a checkbook IRA/LLC to purchase a laundromat. It is a Roth IRA, and I intend to create a C-Corp that the LLC would own (LLC would own either 80% or 100% of the stock). The IRA/LLC would make a relatively small investment to purchase the stock. The remainder of the money to purchase the business (inside the C-Corp) would come from a loan made by the IRA/LLC to the C-Corp. The idea being that the interest on the loan would be a tax deduction to the C-Corp, but tax free income to the IRA/LLC. The C-Corp’s taxable income (after the deduction for interest) would be below $50,000 per year so it would only be taxed at 15% (plus about 4% for state). I would then issue dividends from the C-Corp to the IRA/LLC to get the money out of the C-Corp.

    My understanding is that if I buy the laundromat itself directly through the IRA/LLC it would generate unrelated business taxable income, and the tax brackets for this “trust” income are much “smaller” than those of a C-Corp (i.e., taxable income over $10,700 per year is taxed at 35% for a trust).

    Is it correct that if the IRA/LLC purchased the business directly it would generate unrelated business taxable income? If not, would it be taxable income at all?

    If I am better off from a tax standpoint to create the C-Corp to own the business, is it alright for the IRA/LLC to loan the C-Corp money and also own the stock? Also, assuming I have a non-disqualifed person doing all of the management and all of the work related to this business can my IRA/LLC own 100% of the stock in the C-Corp? Alternatively, can I perform some services for this C-Corp without it being a prohibited transaction? I would pay myself “reasonable compensation”. I greatly appreciate any input you can give me. Thanks,

    Gregg

  51. I am amazed at the ‘lazy’ questions you get asked, such as, what are a specific state’s LLC requirements, etc. Your blog sessions have been extremely informative for me. I have to rate you at the top of my list for these topics.

  52. @WilliamWilliams & @Gregg,

    Your questions are outside the scope of this blog post, but I invite you to call my office for more information –> 877-903-2220

  53. Jeff,

    If you buy real estate in your ira do you still get the depreciation and how is it calculated. Also when you sell you will be taxed at ordinary income rates versus long term cap rates that are less, does it make sense to put real estate into your ira?

  54. Jeff,

    I’m interested in the solo 401k but how would I Qualify for one, I have some rental property outside of my ira money. I understand I have to be self employed, what would be the easiest way to accomplish that and the least expensive?

  55. This looks cool so far, what’s up people?
    If it’s not just all bots here, let me know. I’m looking to network
    Oh, and yes I’m a real person LOL.

    Later,

  56. Jeff,
    I was under the impression that if I were to create an IRA/LLC have it buy a rental house, that my wife could manage the property (collected rents etc.) and that I could do maintence type items (paint the inside inbetween renters) as long as I was not paid and the IRA picked up the cost of materials, but that I would be prevented from doing capital improvement type projects?

    Where in the law or rulings do the prohibitions on this type of activity reside – Would I be at risk of creating a prohibited transaction?, or would I just risk creating a unrelated business income tax liability that the IRA must have funds to cover?

  57. hi jeff,

    I have question on SDIRA LLC. Can SDIRA LLC take a loan from banks or other financial institutions, if yes what are the procedural aspects.
    why because my LLC do not have enough money to invest in real state of outside the USA.

  58. Hi Jeff,

    I am considering taking a portion of my traditional IRA and starting a checkbook IRA/LLC IRA for the purpose of buying gold. Are there any restrictions on using the the LLC to open a futures account at a registered broker and buying regulated futures contracts?

  59. Chris,

    There are no particular restrictions on futures contracts, but more importantly, it would help for you to understand the overall approach of how to run your IRA LLC and how not to. Call my office and we can help you through your due diligence process 877-903-2220 🙂

    Jeff

  60. My daughter has a real estate partnership with me (her mother) we have 2 buildings 50/50- i’d like to let her have one and i take the other to emancipate her from our real estate partnership ( i buy her out she buys me out) this i am aware is disqualified i assume from using my ira funds to buy her out but maybe not . at the same time she could take her ira funds from below and buy me out ?

    Also, she has a sole proprietorship consulting firm doing editorial writing, media design, graphics, promo, publicity, events and music writing recording and band perfomances

    she has been working and deferring paying herself a salary – actually she has been investing her trust money into her business capital – she pays her subcontracted help and keeps little earnings – operating at a loss these last 2 years

    never having contributed to any ira’s. can she convert her sole company into an llc and fund 49k into a solo 401k plan with money she was using to capitalize the company from her now released and vested trustmoney from her deceased father ? can she go back 2 years and pay herself the deferred salary now that she has funds free and clear as she is emancipated from the trust at age 25?

    can she also take some more trust money and set up a real estate ira llc? to buy out my half of the income property?

  61. Hi Jeff,

    Can an IRA LLC have a credit card with the IRA account owner (acting LLC Manager) as the guarantor of the credit card account? The concern here is whether the use of credit card considered a PT.

    Thanks,

    Dave

  62. Can a checkbook IRA be maintained offshore?

    Does this provide any additional protection against the rumored government takeover of IRAs (being forced into SS fund and pay out a small, fixed amount)?

    Thanks.

  63. Hello to All the Guests and Members,
    My PC worked slowly, many errors. Help me, please to fix errors on my computer.
    My operation system is Win Vista.
    Thanks,
    domaAnarm

  64. 1- When using an IRA with checkbook control and you wish to invest in ETF’s, stocks or futures is it as simple as writing a check to a broker account.

    2- If you are using a broker with an existing account do you have to establish a new account or can you use the existing account.

  65. 1 – Yes, when properly setup

    2 – Establish a new account

    Don’t hesitate to call my office for assistance 877-903-2220 🙂

    Jeff

  66. Hi I just registered to this spacious place jeffnabers.com . I want to ask for your opinion.
    Can you tell me please do you trade forex and if yes what forex dealer do you use?
    Do you know of some reliable ones?

    Thanks in advance for your answers.

    P.S. Sorry if I have posted to wrong section this but as you can notice I am new here.

  67. Pleadyloary,

    Thanks for participating in my blog!

    Re: choosing forex dealer:

    As one would choose a casino, for most people choosing a forex dealer should be of little consequence to the end result.

    I’m sure there are systems and people who are making loads of money in forex, but it doesn’t change the fundamental enormity of the risk involved. Even those who make loads of money often lose it back.

    If you explore more of the blog here, you may gain further insight as to why I would consider forex to not actually be “investing.”

    I hope you’ll be able to benefit from my blog as an information resource 🙂

    Jeff

  68. Just wanted to say hello to all here. This is my first posting here.

    It definitely seems like the owners of the group sure are doing a marvellous job.

    I look forward to find a lot of information here & assist others as much as I can.

  69. I had opened a self-direct IRA with one Custodian, moved old 401K funds and set up a LLC, which member is XYZ Custodian FBO Miguel ABCD Self direct IRA . I am the manager on the LLC operating agreement.

    One topic that looks still confusing, is the application to obtain the EIN with the IRS.

    Should we provide (as resposible Party) the name of XYZ Custodian FBO Miguel ABCD Self direct IRA and the Custodian EIN in the aplication, as a existent business owner or should I provide my SSN as an individual.

  70. Am I ok with regards to PT if I set up an LLC with myself owning 40% and another partner who is not a disqualified person owning 60%, then have my IRA LLC loan money to the 60/40 LLC at a market rate of interest?

    Thx,

    Ed

  71. Hey Jeff, I want to buy an office condo to rent out. If I rollover money out of my IRA into a self-directed IRA LLC, form the LLC to own the office condo and have the LLC purchase the condo, can I then rent the condo at market rates to an S-corp that I own?

  72. David T.,

    I would not recommend personally renting a condo that your IRA LLC owns.

    The government doesn’t say “it has to be a fair deal when transacting with a conflict of interest.” Instead it says “a conflict of interest is prohibited.”

    If the rent were truly “market rate,” then as IRA LLC manager, why not rent the unit to someone else at the same rate?

    If the rent were truly “market rate,” then as an office condo tenant, why not rent another similar office for the same rate?

    I’m not suggesting that you aren’t really aiming to do the deal at the market rate, but the above questions are the way the government would probably look at it. And when it comes to answering those questions, there’s not a strong answer.

    So if you are really in need of an office condo, I suggest renting one as a standalone deal. And same thing with the IRA LLCs need to find an investment. Keep them separate and sleep well at night.

    This can also ensure that you find the best investment rather than let an ulterior motive steer you into a mediocre investment.

    I hope this helps 🙂

    Jeff

  73. Ed,

    No, that’s not okay.

    Any time there is a conflict of interest, it’s a prohibited transaction. In that scenario your LLC is indirectly loaning money to you.

    Think more about investing your IRA LLC into a good investment rather than steering your thoughts over to investing in yourself.

    Oh, also, you may want to consider converting your IRA LLC to a Solo 401k and taking a $50,000 participant loan.

    http://www.solo401k.com/2009/03/02/how-to-borrow-money-from-your-solo-401k/

    – Jeff

  74. Jeff,

    Thank you, however I was speaking more to the fact that a DP is “Any business entity i.e., LLC, Corp, Trust or Partnership in which any of the disqualified persons mentioned above has a 50% or greater interest”. Thus, if the IRA loans money to an entity where I hold less than 50% ownership, and the transaction is at arms length (fair rate of interest paid to the IRA), that would be OK. Thoughts?

  75. Hi Jeff,

    This is a very helpful site. Thank you.

    I am confused about this provision: IRC 4975(c)(1)(E) prohibits any direct or indirect act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account.

    My questions:

    1. If I’m the account holder and have a one person LLC that I manage in my IRA wouldn’t I be the fiduciary and every time I buy or sell real estate in the LLC it would be for my own interests so therefore it would be a prohibited transaction?

    2. If I post ebay ads for this property and/or put a for sale sign out at the property would this be a prohibited transaction since doing these items would be providing a ‘service’ to the plan and be in my own interests?

    Thank you.

  76. I have a self directed IRA with a custodial account in Ohio. I recently created an LLC to conduct business in the state of Ohio as well, but it is not the same type of business that my 401k custodial account was created for. Currently, I would be interested in using some of the funds in the custodial account for the newly created business and wish to also have checkbook control over the transactions for both businesses. Is there anything that you would suggest me to do at this point to make this happen?

  77. Wonderful site.

    Can I set up a self-directed solo 401K or IRA LLC that invests 80% in a property, with the other 20% invested by me at time of purchase/LLC formation, with the 20% carved out to provide named dates and times during which it is available to me for personal use? The 80% would be purely for rental income.

    If I set up some form of an intermediate time-share company would it help?

    Thanks
    Guy

  78. @Ed – It’s a common misconception that it’s okay to loan IRA money to an entity where a DQP owns less than 50%. The Department of Labor has addressed this directly in an Advisory Opinion, and it’s a prohibited transaction if the DQP ownership is “significant,” the definition of which is not set at any specific numeric threshold. At a minimum, any entity in which a DQP owns 20% of more, in my mind, should definitely avoid doing any business with the plan. This is due to IRC 4975 (c)(1)(D) and (E). The “D and E” rules trump everything and they say that no matter the numbers, if the transaction is in the interest of the fiduciary, it’s prohibited. That casts a wide net that I think you should stay away from.

    @Guy B.- See this post here —-> http://jeffnabers.wpengine.com/2008/07/24/coinvesting-with-your-plan-partnering-with-disqualified-persons/

    – Jeff

  79. Jeff – Great, informative site.

    Let me preface this by saying I have run this by a lawyer and two different CPAs and gotten three different answers. I called the IRS Taxpayer Helpline and talked to the Personal, Business and Tax Exempt centers and got absolutely NO answers.

    I already have a SIDRA that owns and funded an LLC. I am the LLC Manager with “checkbook” control.

    I do not want to fall afoul of any IRS rules regarding self-directed IRAs nor do I want to trigger any tax obligations other than what would normally result from withdrawing money from the IRA eventually. I am currently withdrawing money from the IRA under the 72T provision of the IRS code. I get SEP payments on a monthly basis; these continue until May 2011. After that time I can withdraw without penalty as I will be over the age of 59 1/2, with any withdrawals subject to my normal income tax.

    What I want to do is have my LLC purchase houses in somewhat dilapidated condition through a realtor that is in no way related to myself or my wife. Thus we are avoiding the disqualified person problem in the actual purchase. The intent of the purchase would be for the LLC to own a rental property for a minimum of two years and to have the property produce income for the LLC. Because these properties are in a less desirable area, I would expect little to no appreciation during the time we would hold them. We may hold them quite a bit longer than two years.

    Acting as Manager of the LLC, after purchase I would have any necessary repairs or improvements made to make the house a rentable property. I would contract with companies and or individuals to have this work done, keeping records of invoices, lien releases and payments made by the LLC. Again, I would avoid any involvement with a disqualified person. I would act only as Project Manager, making sure all work was done on time and up to required standards. I would take no form of remuneration for this work; there would be no personal gain or benefit.

    Once the house was rehabilitated and fit for occupancy, acting as Manager of the LLC, I would advertise it, find a tenant and accomplish all necessary occupancy paperwork to complete the leasing transaction. Again, I would take no remuneration or benefit from this work.

    During the lease, I would act as Manager for the property, collecting rent for the LLC, contracting out for any necessary repairs and dealing with whatever problems present themselves. There would be no personal gain, benefit or remuneration for managing the property in this fashion.

    I do not want the purchase of these rental houses to generate any tax changes for the SDIRA LLC. I specifically want to avoid Unrelated Business Income Tax. If by improving these dilapidated properties to make them suitable to rent the LLC becomes subject to UBIT or might require a Form 990-T to be filed, please let me know as I do not want that to happen.

    I have been told that I CANNOT do this. That I have to buy fully renovated houses through a separate, independent, non-disqualified transaction and then rent them out.

    So, my question for you is, is there really a significant tax difference/problem if the LLC buys the house from an intermediary after said intermediary repairs/renovates the house versus the LLC buying the house, me as Manager contracting for repairs and passively managing it as rental for 2+ years in both cases?

    In closing…I wish I had found your site before I had Guidant set up my SIDRA/LLC!

  80. JGN,

    Firstly, congrats on taking action to get your wealth under your own control 🙂

    Secondly, might want to read this:
    http://jeffnabers.wpengine.com/2008/05/30/landlording-your-ira-llcs-properties-is-it-allowed/

    Thirdly, I don’t think the government will claim UBIT occurred unless you either leverage the property with debt or unless you personally have so much involvement that the activity looks more like a business than an investment transaction. Absent of both of those should mean absent of UBIT.

    🙂

    – Jeff

    (Oh yeah, don’t forget to opt in to my email list to be kept in the loop with inside information and access to special products and services) –> http://www.nabers.com/services/asset-safety/

  81. Jeff,

    Thanks for the reply.

    I did read the landlording article and I have held that opinion; passive landlording is the safest route vis-a-vis IRS penalties.

    In fact, given all the conflicting advice I have received from 3 different CPAs and two different lawyers, I’ve decided to just hire a Property Management firm to stay clear of the IRS.

    Which brings me back to these two questions on the initial purchase and renovation of the property. As I said, I have conflicting and very scary advice from these CPAs and lawyers, so allow me to ask specifically if I can do the following with my IRA “checkbook” LLC.

    As Manager of the LLC can I purchase a rental property through a realtor, paying in full with a check from the LLC?

    Can I then, as Manager of the LLC, contract directly with companies to renovate/repair the property to make it suitable for use as a rental/occupancy and pay these contractors in full with a check from the LLC?

    I have been advised that my personal involvement as Manager in these two tasks would put me at risk of IRS penalties.

    Can you address that aspect?

    Thanks,
    JGN

  82. Jeff,

    In the article that starts this comment session you say about disqualified persons:

    ” Also include anyone who provides services to your retirement plan.”

    Do you mean anyone dealing with the actual IRA management aspect, for example the custodian?

    Or would it include a company or person working on one of the LLC’s rental properties as in a plumber installing a water heater? Is he providing a service to the IRA?

    Thanks,
    JGN

  83. JGN,

    Yes, the custodian is a DQP as well. It includes those providing ongoing services to the plan. A plumber providing a one time service to the plan’s property isn’t considered a DQP according to a DOL advisory opinion.

    As far as what you can do as LLC manager, it’s “ministerial” duties.

    There’s no hard and fast guide. If it seems like you are running a business, you may have problems. If it seems like you are administering an investment, you should be fine.

  84. Jeff,

    Like others I have been looking into SDIRA’s for two years now and have been afraid to do it, however your site has got me going, it’s just great.

    ? 1. I have Roth, my Husband has Roth. We want to buy land, hold on to it until we retire. ? Do we need two LLc’s or will one work.

    ? 1. Can other family with IRA LLC’s buy with us.

    Thanks Wee

  85. Wee,

    I’m actually wrapping up a new post on this topic right now. Make sure you are subscribed to RSS, and you’ll see the post early next week 🙂

    Jeff

  86. Very informative site!

    I’m considering setting up a checkbook IRA to make a real estate loan at an IRS-approved market rate secured by a standard deed of trust. The loan would allow a 501(c)(3) nonprofit corporation to purchase a building from a 3rd party. So far so good.

    The twist is that I am a director of the 501(c)(3) that would be the borrower. I get some personal satisfaction from the good that is done by the nonprofit, but I receive no monetary benefit–no salary, fees, expenses, or anything else of tangible value. Does my role as director of the nonprofit make the nonprofit itself a DQP?

  87. Thank you, David.

    And bravo for your honesty.

    Now, looking at your situation, that personal satisfaction actually does create a prohibited transaction per IRC 4975(c)(1)(D) and/or (E). That personal satisfaction makes the transaction partly in your personal interest, and the rules say your transactions must be in the sole interest of the retirement plan.

    It’s not that the nonprofit corporation is necessarily a disqualified person. The problem is that at the point at which you would make the decision, you would understand and expect that side benefit, even though it isn’t monetary.

    Now that you poked your head into the Self-Directed IRA/401k word, keep going and pursue control of your wealth, but look for transactions that don’t have this type of possible conflict of interest you described.

    Good luck!

    Jeff

  88. Thanks for your quick and thoughtful answer.

    However, it seems to me that your logic would seem to apply equally to the CHIRA which has been specifically allowed in an IRS private letter. The CHIRA clearly and by design serves the IRA owner’s general, intangible benefit in terms of personal satisfaction, etc. The personal satisfaction and the desire to help a charity were apparently not of major concern to the IRS in that case.

  89. David K,

    I understand that the CHIRA seems incongruent, and there’s more behind that…

    I don’t pay much attention to the IRS’s interpretation of this area of law. Not only do they not make the law, but they also haven’t had the authority to interpret it (at least not the section that relates to retirement accounts) ever since the Presidential Reorganization Act of 1978. In that Act, the authority to interpret the retirement account laws (IRC 4975) was taken from the IRS and given to the DOL. The Department of Labor.

    So, certain DOL Opinion Letters set a precedent that exclude the CHIRA concept. So, basically the DOL’s opinion clashes with the IRS, and in a legal authority sense, the DOL’s opinion matters and the IRS’s opinion doesn’t matter.

    The twist is that the IRS does most of the enforcement for retirement account laws.

    Now zoom out all the way and take a look at this picture.

    The IRS (or the whole government for that matter) does not have a history of acting logically or compassionately.

    The literal and technical application of the laws and regulation here are very clear. The IRS enforces all that, and they think the CHIRA is fine today. And a reasonable and compassionate organization would never give people one signal and then enforce a real law to the contrary.

    But again, most government agencies aren’t always reasonable or compassionate. Even when they have good people working there with good intentions, the fact that government activity is a non-competing/monopolistic one tends to allow any kinds of mundane or extreme actions.

    In other words, stranger things have happened than the IRS changing its mind on something. And changing its mind to agree with the actual law isn’t far fetched at all.

    I’m not saying the IRS is going to seek and destroy CHIRA accountholders. They could, but they probably won’t. I am saying that an IRS letter that makes some attorneys comfortable to do the CHIRA doesn’t mean the real, actual, clear law won’t be applied in most or all other circumstances.

    I hope this helps 🙂

    Jeff

  90. I just paid $1,299 for a firm to set up a self directed Roth Solo 401k for me, complete with EIN. Basically, they sent me the completed plan documents and had me sign them. They are attorneys and siad they will provide ongoing legal advice as needed. I am attempting to set up a trust a/c, and neither Bank of America or Wells Fargo seem to know what I am talking about and trying to do, even though I provideded them a copy of EIN paperwork from the IRS in the name of John Doe 401k Plan Trust and the Adoption Agreement. They seem to be confused that I am the trustee and will be making the investment decisions. They seem to think that because I am opening a trust a/c at their bank, they must put me into an IRA a/c which is limited to their investment choices. Am I being charged too much and why am I having so much trouble with the banks in getting an a/c opened?

  91. Hi 🙂

    My understanding is that the IRA is protected from outside fources.
    But since my SDIRA LLC will be buying rentals, and they come with a lot of liabilites, I would like to separate the rentals into different “baskets” or LLC’s so that if someone slips and falls at one property, it will not risk my entire IRA if everything is owned by one single entity.

    Is it ok to set up several LLC’s that you then direct the custodian to invest in? (capitalize)

    Ideally there would be a “master-LLC” that would be the sole member of several subsidiary LLC’s and thus one could avoid moving the money back to custodian every time I would want to move money from one subsidiary LLC to another.

    Thoughts?
    And thanks so much for your time 🙂

  92. @Jim H,

    Your experience is pretty typical of our competitors. We/Nabers Group (www.nabers.com) have the most experience with self-trustee 401k plans and IRA LLCs.

    Even though you aren’t our client (tsk tsk) head over to our community where you can probably find a little bit of info on explaining things to your banker >>> http://community.nabers.com.

    – Jeff

    P.S. If you want to see what the process could have been like with us, check out http://www.unlimited401k.com/tutorials to see how the bank account is automatically setup with our system 😀

  93. I am considering setting up a checkbook IRA to buy tax liens in Florida. Based on my age, I receive minmum disrtibutions based on the value of the IRA as of 12/31 the previous year. Would I determine the value based on amount paid for the certificates plus the accurred interest as of 12/31? Who would issue the check for the distribution? Would I report to the IRS the total value of the IRA each year?

    If it were property, how do you determine the market value of the property each Dec? Property values are rather subjective. The IRS could challenge the value I assume saying you are trying reduce your min distribution by too low a valuation of the property.

    Thanks.

  94. HI Jeff,

    Would you be interested in being a guest on one of our weekly educational real estate webinars discussing the use of a self directed IRA to buy real estate? As you know this is a hot topic and looking for experts to discuss with us and our clients.

    Thanks,

    Steve Saunders
    Silver Stream Advisors
    http://www.slvrstream.com
    801-352-4052

  95. I am considering setting up a self-directed IRA to invest in a multi-family property.
    I will also be investing additional non-IRA funds as well in the same property.
    Is this allowable and if so do the investments in the property need to be “segregated” in some way? e.g., does the property need to be broken up into separate units such as condominiums. Appreciate your thoughts.

  96. Hello all!

    Business has really picked up, so if you’re really serious about getting help with your self-directed investing please call my office at 877-903-2220 🙂

    Jeff

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