Real Estate Investing Inside Your IRA
As you develop your business be sure to set aside funds for retirement. One route is the self-directed IRA, SEP or 401k where money is placed in the hands of an administrator. There are custodian fees, delays and restrictions in what the funds can be used for. Still, tapping others who have set up self-directed retirement accounts is a great way of finding private money for your deals.
You will need an attorney who is familiar with the IRA-LLC in order to set up a checkbook IRA properly. That attorney will help you to move your IRA to a self-directed custodian and can help consolidate various plans (except for Roth IRAs). The IRA will then form and own a special limited liability company in which you, the business owner is named the manager and the sole owner. The LLC inside of the IRA helps to protect what might otherwise be a somewhat vulnerable IRA account from being pierced in a lawsuit, but only if very specific language has been used in the organizational documentation for the IRA-owned LLC. Without the proper set-up the IRA may be subject to taxation as well.
Setting up the LLC as a partnership, the tax liability passes through to you as an individual and the entity itself is not taxed. No taxes will be owed on the passive profits generated by this IRA-LLC unless you as manager elect a distribution. You can use your checkbook IRA to elect a distribution or to pay for other assets such as real estate or stocks. You have checkbook control over your own investing within the retirement plan.
The only asset that will be owned inside the IRA itself will be the LLC. This structure provides considerable asset protection because if someone else gained a “charging order” against the LLC the person or entity with that order would have only limited rights at most to distributions, and not to actual ownership or management of the entity. Let’s say the entity makes $50,000 in profit and the profit is kept inside of the entity. The person holding the charging order would owe taxes on the profits since the LLC profits flow through to the individual owners. You as the owner of a tax free entity (the IRA) would not owe taxes, but the owner with a charging order would owe taxes, even though no distribution is made. This fact makes it extremely unattractive for individuals and entities to come after assets held inside an IRA.
Take advantage of this strategy to build your nest egg and to gain the greatest level of control over your own investment strategies.