By Tim Berry
Self-directed IRA LLCs, also known as checkbook IRAs, come with some serious investing “power”. They provide absolute control of IRA funds to self-directed investors, but they also tend to remove much of the oversight of your activities that would normally protect you from prohibited transactions. Why do self-directed investors persist in forming IRA LLCs despite this potential danger? Here are four reasons:
1. Instant access to capital
If you or someone close to you holds check-writing privileges for the capital in your IRA LLC, then your access to that money is instant. This means your self-directed account can acquire assets, like real estate, quickly, thereby preventing you from missing out on great deals that might pass you by if you were using a conventional self-directed IRA and running everything through your custodian.
2. Reducing the effects of prohibited transactions
A properly structured IRA LLC can ultimately reduce the “ripple effects” of prohibited transactions in some cases. However, it is better to simply avoid these transactions completely!
3. Lower account fees
An IRA LLC may enable you to consolidate assets in your account in such a way as to reduce your annual fees. For example, if you own 200 pieces of real estate in a self-directed IRA, you might pay an annual fee on each piece of real estate. On the other hand, if those assets are held in an IRA LLC, you could end up paying just one annual fee on the LLC.
4.Portability of your account
In the event that you elect to move your self-directed IRA from one custodian to another, an IRA LLC can help simplify this process. Looking back to the example in #3, if you have to transfer 200 assets individually, this could be very time consuming. Transferring just one asset, the LLC holding the 200 pieces of real estate, will likely be much simpler and less expensive.
IRA LLCs are powerful tools, and every self-directed investor considering employing them must be sure they understand all of the positives and negatives associated with these popular retirement entities. Failure to understand the strengths and weaknesses of a checkbook IRA can put you in hot water when you think you are most protected!