Why You’d Need an IRA LLC (Everything You’ll Need to Know)

Transcript:
(00:00) all right let’s talk about the IRA LLC sometimes called a checkbook control Ira this is a super popular structure for anyone using a self-directed IRA particularly to invest in real estate there’s other instances why it’s helpful I’m going to go over those here in the video today now I’m Matt senson wealth lawyer award-winning entrepreneur also author of the self-directed IRA handbook the number one book in the self-directed ira field that actually has three chapters on this structure alone I’ve got three chapters in here by the way
(00:28) over 100 citations in the book so I know what I’m talking about here I’ve read all the cases been through all the tax code on this this is what we do every day in our law firm and at my company directed Ira all right let’s break this down and why you might want an irlc and also how to use it properly I’m going to hit both of those points now the first thing I want to make sure everybody understands is an IRA LLC consists of two things it requires a self-directed IRA which I’m going to talk about here in a moment if you’re unfamiliar with
(00:55) what the heck that is but it also takes an IRA LLC this is a special type type of LLC we call an IRA LLC the documents the paperwork is a little different than a regular LLC and by the way if you already have llc’s for Real Estate or businesses this LLC is different it’s going to be its own LLC separate from your personally owned llc’s or other entities you might have so let’s talk about what the heck is a self-directed IRA well a self-directed IRA is an IRA that can invest in any asset Allowed by law one of the assets it could own is an
(01:27) LLC now you could have a self-directed Ira that owns real estate directly so I could have an IRA that instead of buying a mutual fund or a stock the asset my IRA owns is a piece of real estate let’s say it’s a rental property when there’s income on the rental property it goes to the IRA when the property sells for a gain that goes to the IRA and that real estate income whether it’s cash flow or gain when I sell it is building up the value of my IRA instead of my IRA building up value investing in a mutual fund or stock NOW people do this and
(02:00) like to use self-directed IAS because they feel like they’ll have a better return on their investment from the real estate or other alternative assets than they might have from the stock market so that’s what a self-directed IRA is now a lot of people are like all right Matt well I heard about a self-directed IRA and you said I could buy real estate in it and I went to Fidelity and Fidelity told me I can’t do it with my IRA well that’s cuz Fidelity IAS can’t do that they are brokerage Ira company when you have an IRA at Fidelity or TDM Merit
(02:28) trade or any broker dealer they’re going to let your IRA invest in the products that they sell stocks bonds and mutual funds that doesn’t mean IRAs can’t own real estate that means that brokerage IRAs can’t own real estate okay they’re restricting you to buy the assets that they offer as Investments for their customers so you need to move the self-directed IRA from a custodian like Fidelity or your brokerage Ira over to a self-directed IRA provider that’s what our company directed Ira does we’re the fastest growing company in the space and
(02:57) we help clients to use those accounts IAS whether it’s traditional Roth sep even your HSA or solo K we offer those accounts that enable you to invest in any asset Allowed by law real estate whether it’s a rental property precious metals private notes private companies small business these are all assets that your IRA can actually own but it takes a self-directed IRA okay so I got the self-directed IRA set up I mve my money from Fidelity at my IRA there and I transferred it over to my IRA at directed Ira now when you have an Ira at
(03:30) directed Ira this is your self-directed IRA you own it now that Ira can go buy an asset well if you’re buying real estate one of the drags on real estate is you don’t own it your IRA does and so our company is actually on the deed we’re on the contract so it’ll say directed Trust Company FBO Matt sson Ira for example Matt soron is not buying the property Matt soron Ira is buying the property so that’s what’s going to be on the contract to purchase the property we will sign the contract upon your authorization and request we’ll send the
(04:03) earnest money from your IRA when you go to close we’re going to sign the closing documents for the IRA we’re going to send the wire to close from your Ira’s funds and then incomes going into your IRA account you’ve got expenses or a handyman or a contractor that has to get paid from your IRA now when your IRA is investing in a private fund or in a business or other things like that that’s pretty easy the money’s invested they send distributions or dividends but for something like a rental property there can be a lot of back and forth and
(04:30) a lot of Real Estate Investors don’t like the fact that they’re going back and forth with us hence why we have the IRA LLC and why this is such a popular structure rather than my IRA owning the real estate directly my IRA owns an LLC 100% that LLC in turn is going to own the property so now my Ira’s asset is 100% of the ownership of XYZ Investments LLC whatever I wanted to call this LLC my IRA owns it 100% now there’s different ways to structure this I’m going to go through different IRAs owning one LLC an IRA an individual
(05:09) owning an LLC we’re going to go through those options but I just want to hit this first this is the most popular by the way your IRA owning an LLC 100% now this LLC is going to have a bank account this is an LLC business checking account we have a great Bank we work with that helps set those up and we’re going to send the money from your IRA to that LLC business checking account now you’re going to be manager of the LLC manager of the LLC is like president of the corporation you will be the person that can sign for the LLC when you go to make
(05:38) a contract to purchase when you’ll hire a contract when you’re using the LLC business checking account you’ll be the manager of the LLC so you have authority on the llc’s checking account now remember you don’t own this LLC your IRA owns the LLC so you don’t put money in the LLC you don’t take money from the LLC because you don’t own it your IRA does so we’re going to send money from your Ira to the LLC whatever amount you designated let’s say it was $100,000 will send will wire the money or a it into that LLC business checking account
(06:08) now you’re manager of the LLC now you go to buy the property and the buyer on the purchase contract is the LLC XYZ Investments LLC or whatever you call the LLC and you’re signing the contract you’re cutting the earnest money check you’re wiring the money to close you’re signing the closing documents because you’re authorized to act on behalf of the LLC oh you need to hire someone to fix the property to work on it or to a rehab you’re engaging them from the LLC and cutting them a check or using a debit card because you can have a debit
(06:36) card associated with the IR LLC as well so this puts you in a control position the bank account aspect of it is why a lot of people call it a checkbook control Ira we really just call it an IRA LLC but you will have a checkbook in control of it to pay expenses and that checking account can only be used for the IR llc’s investment so like I said you don’t own this LLC so you don’t use it for your own expenses nor can you take money from the LLC if you’re like well I want to take money from this Matt I’m in retirement now I’m in my 60s I
(07:06) want to pull money out from this okay send the money from the LLC back to your IRA and then you take a distribution from your IRA all right so that’s really the primary benefit of the IR LLC is it’s giving you greater control of your Investments if you’re buying property at auction or you’re managing rentals or you’ve got rehabs it just put you in better control of managing the assets I even use the IROC for my own self-directed invest pres myself and I’m the CEO of directed Ira I can tell people what to do I know the buttons to
(07:34) push I know the forms that need to be filled out it’s faster and easier for me to just use the irlc for my own real estate Investments with my self-directed account all right now I want to hit a couple notes on this because there are some cases on this I go into much more detail this in my book but there’s a case called Ellis versus commissioner which is a guy that had an irlc and he was paying himself a salary because he was the manager of the irlc that causes what is called a prohibited transaction action you cannot pay yourself from
(08:02) being the manager of the LLC or take any compensation because of your Ira’s Investments now he was audited the IRS alleged prohibited transaction he fought it in Tax Court he lost he fought in the court of appeals he lost we’ve always told clients you can’t take a management fee or a salary from your IRC it’s even restricted in our IRC documents every Ira custodian doing this is going to tell you you can’t do that so don’t even try to do that you cannot take any compensation there’s a easy case B on it Ellis versus commissioner that goes into
(08:31) the detail now there’s another case that came out on IR LLC recently called mcti versus commissioner and a lot of people have referred to that case to say you can’t use IR L’s the court struck them down that is not correct MCN versus commissioner was someone using an irlc like this but instead of buying real estate they were buying precious metals they were buying gold which your IR can own gold but there is a specific rule for storage of gold owned by your Ira that says the gold must be stored at a bank and a bank under the definition is
(09:04) a bank a credit union or a Trust Company what was happening in that case the mnti case is the person used their irlc and they stored precious metals at their home that violated a unique rule for IAS on storage of precious metals owned by your IRA it didn’t blow the IRA LLC or cause any other issues it was a violation of the storage requirement so the IRS required those precious metals to be distributed that person lost in tax court but the irlc structure wasn’t invalidated the court just enforced the precious metals rule in that case so be
(09:40) careful what you might be hearing about MCN versus commissioner so those are the two big cases recently on this there’s prior cases from the 90s on this called Swanson versus commissioner was where this came about again a lot of detail there’s some field service advisory rulings from the IRS on this those are in my book two about how the structure can work that also talk about not taking compensation all right now the nice thing about this IR LLC is once it’s set up there’s no tax return required for the LLC with the IRS this is called a
(10:07) single member LLC or disregarded entity for tax purposes so you will not be required to file a tax return to the IRS now your IRA custodian files things for your IRA every year but you don’t have a requirement to file anything for the LLC to the IRS now you need to keep the LLC active in your state some states there’s zero fees zero things to file like Arizona some states there’s an 800 $100 annual fee for your LLC and something you got to file like California Most states are like 50 bucks 100 bucks on an easy form you fill out to keep the LLC
(10:37) active so you do need to make sure the LLC stays active with the state now let me hit some frequently asked questions we always get about the IR LLC now remember there’s a rule called the prohibited transaction rules for IAS that says your IRA cannot transact with you or your spouse your parents or your kids these are called disqualified people to your IRA so for example my IRA cannot buy real estate from me personally okay I’m restricted to my IRA my IRA can’t buy a piece of real estate and rent it to my kids okay that causes
(11:09) what’s called a prohibited transaction where your IRA cannot transact or provide any benefit to people who are disqualified under the rules and the disqualified people are you your spouse all of your spouses for those you in Utah your kids your parents okay those are all the prohibited disqualified people so same thing with the LLC for example if my IRA LC about a rental property I can’t rent it to my kid okay that would cause a prohibited transaction Also let’s say that my irlc bought a property that’s being rehabed I
(11:40) can’t go in there and do the rehab myself and go work on the kitchen and Rehab it and fix it all up whether my IRA LLC pays me or doesn’t pay me that still causes a prohibited transaction now my IRA can go by a rehabed property and I can use the IROC and the IROC can pay for the rehab the materials people to do the work but it just can’t pay a disqualified person which again is you your spouse parents kids so all those rules for IAS and prohibited transactions still apply to the irlc now the irlc can invest in many different
(12:12) things like mylc is bought rental properties it’s done private money lending where it owns notes uh invested in private funds and small businesses like the IRC can hold multiple assets here I’m just showing the rental properties it’s a common and easily understood example all right let’s talk about how you can use what’s called a mult time member Ira LLC so here we’re using two IAS and this could be three or four but we’re going to have more than one Ira investing into an LLC that in turn is going to go own an asset here
(12:41) and I’m just showing real estate here this could be any asset that’s any alternative asset you want to buy now let’s say this is my IRA and my spouse’s Ira let’s say we’re going to fund the LLC with 100 Grand to go buy a property that takes $100,000 if my IRA invests $40,000 and my spouse’s Ira invests $60,000 we’re going to break up the ownership of the LLC 40% to my IRA 60% to my spouse’s Ira now a lot of people might be like well Matt I thought IRAs of spouses are prohibited to each other under Ira rules that is true but see
(13:12) your IAS here aren’t transacting between each other where my IRA is selling something to my wife’s Ira instead they’re co-investing into an asset in a newly created LLC they’re not buying or selling anything between each other they’re co-investing into an asset which does not cause a prived trans transaction there’s some IRS and doal opinions on that in my book if you want to dive deep on that but here what we have to do is we have to break up the ownership of the LLC based on the dollars invested so I gave the 4060
(13:41) example so it’s going to be 40% 60% between the IRAs let’s say it was three different people friends or other family members IAS three IAS investing in LLC each of them put in $100,000 for 300,000 total each Ira is going to own onethird of the LLC now the benefit of this LLC is I’m combining multiple Ira into an LLC to increase the purchasing power of the LLC that’s where I like this for example I’ve ran across clients that are like well Matt I have 100K in my IRA and my spouse has 200k in their IRA and there’s a property we want
(14:16) to buy for 300 neither of us can buy it with our Ira alone but if we co-invest them into an LLC together we have enough money to go buy that asset that’s where I like the irlc where it makes sense to co-invest with number of different IRAs again I’m showing two but it could be three four five into one LLC to buy a property so the benefit is I’m putting multiple pools of funds into the LLC to give us greater purchasing power now there’s a downside to the multi-member IRA LLC the downside here is federal tax return see when I have the IRA LLC owned
(14:50) by just one Ira it’s a disregarded entity for tax purposes but when multiple Ira own the LLC now it’s a partnership for tax purposes so the LLC needs to file a 1065 partnership return to the IRS and one to the state where it’s investing now there’s no tax due on the 1065 return but it is still something you have to file each year to track the income and expenses and then k1s get issued to the IRA the IRA typically don’t do anything with them because there’s no tax on them but you do have that partnership return going to
(15:20) the IRS so that’s downside number one downside number two if I’m co-investing IRAs of let’s say spouses or people who are disqual qu ified under the rules what happens is if I funded this with 100 Grand from my IRA 200 Grand from my spouse’s Ira so my IRA owns a third my spouse’s owns 2/3 if we want to get more money into the LLC we have to follow that 1/3 2/3 or whatever the percentages in when we first set up the LLC so if we need $10,000 in here in the LLC to cover an unexpected expense I’m going to have
(15:53) to put in onethird of that 3333 from my IRA my spouse’s Ira is going to put in the differ from hers which owns 2/3 of the LLC and so we’ve always got to follow that ownership percentages as more money’s coming into the LLC or as we’re sending out distributions from the LLC same way let’s say I got a $100,000 to distribute from the LLC back to the IRAs which by the way if you have profit here you can leave it in the LLC checking account to go buy more assets now remember you can’t take money from the IR LLC you don’t own it the IRA do
(16:24) so if you’re in your 60s or so or later in retirement where you want to live off the income that’s generating from these assets you would send the money from the IRA LLC back to the respective IAS based on their ownership so if there’s 100 Grand here you want to send back 33,000 goes to your IRA 66,6 and change you know goes back to the spouses so we’re always going to send money back and into the LLC from to the IRAs based on their ownership percentages now let’s change the facts a little bit here let’s say
(16:50) this is your IRA and your friend’s IRA and you put in 1/3 your friend’s Ira puts in 2/3 now it doesn’t really matter about sticking to the ownership percentage for example if you needed $10,000 more in the LLC one of your IAS could just fund it and maybe your ownership goes up a little bit it doesn’t require you to go prata and stick to the ownership percentages between people who are not disqualified so you have a lot more flexibility if it’s non- disqualified people which even be like a brother or sister so this is say this is your IRA
(17:19) and your sister’s Ira that’s a lot easier we can mix up the ownership pretty easy you can change it later you can have one put more money in and get greater ownership that’s totally fine but if it’s spouses or anybody’s IA that are disqualified to each other like yours and your parents or yours and one of your kids or your IRA and your spouse’s Ira once we set that ownership of the LLC it’s fixed all right let’s hit the last scenario of the IRA LLC which is where you can use multiple IAS and individuals to fund an LLC to go buy
(17:51) an asset this is a popular structure maybe you’re partnering with some other people on a deal where you’re putting in some Ira money another person’s putting in some personal cash you have another family member throwing in Ira money and it works the same way in that we break up the ownership based on dollars invested this is version a of this structure so there’s a couple varieties to this but the easiest and most common would be is hey I’m putting in 100K for my IRA my other friend’s putting in 100k from their IRA and then my brother’s
(18:19) putting in 100K of their personal cash and non Ira money that’s cool we can still do an IR LLC multi-member here going to be a partnership tax return and we just break up the ownership based on the dollars invested totally fine now what if this is even your IRA your spouse’s IRA and your personal cash that’s fine too we can do that where we break up the ownership based on dollars invested you can have personal cash invest in the LLC plus Ira cash and that can go by a particular investment asset now what you cannot do though is you
(18:48) cannot be like well I’m going to be an owner in the LLC cuz I found the deal or I’m going to do the work but I’m not putting in money and then my IAS are going to put in the cash that doesn’t work cuz you’re a disqualified person to the IRA what’s basically happening there is you’re getting value from the IAS to yourself personally for doing work that violates again the IRA rules the prohibited transaction rules but we can do this structure and it’s common where we’ll see one person let’s say a real estate investor or a business person
(19:16) that’s doing the work in the investment or the business and IRAs are coming in investing the cash that’s totally fine as long as this individual getting ownership in the LLC for the work is not disqualified to the IRA let’s just say they’re friends or other investors but it’s not like you and your spouse or you and yourself here where you’re getting ownership personally for doing the work and the IRA are investing cash okay so depends here on who that individual is getting ownership for services now this does require again partnership tax
(19:47) return in this example here the k1s from the LLC would go to the IRAs and then the individual for their ownership would get a K1 to themselves personally which will go on their 1040 and on their personal tax return now remember the documents for the IRA LLC are unique than a regular LLC this is not something you crank out on Legal Zoom this is not an old LLC you’ve got laying around those aren’t going to work you want a new Ira LLC set up with the right documents whether you’re using directed Ira the best self-directed IRA company
(20:14) out there or you’re using another Ira custodian that allows for IR llc’s make sure that documents are being done right I have a checklist in my book that goes over the terms you need in your irlc documents to make sure it’s compliant and make sure it’ll get approved with an IRA custodian whether it’s directed Ira or something inferior provider now the best way to get started on this is you can book a call at directed ira.
(20:34) com to talk to one of our account Specialists on setting up the self-directed IRA we have a ton of resources there my book is a great resource we have webinars podcast episodes going over the irlc you can get a consult with one of our lawyers we’ve got you and we can go over the structure and how to make sense of it for your specific situation and your self-directed Investments please make sure you’re subscribed to my channel where I’m going over the self-directed IRA strategies and other ways to help you build wealth and take control of
(20:58) your retirement we’ll see you next time