Self-Directed IRA's... Have Control Over Your...

CHECKBOOK CONTROL OF YOUR IRA FUNDS

A self directed IRA is an IRA account that is to give you more control over your retirement money. Unlike traditional IRA, you can invest in real estate, tax liens, etc. Self Directed IRA work with the trust company (to keep your funds tax deferred) and a LLC is set up to invest your IRA money and to be owned by your IRA. This is an idea that many people can’t get their minds around, especially if you have never owned an LLC or a Corporation. In business, the reason you start an LLC or other corporate structure is to separate yourself from your company. The LLC or corporation is its own entity and you become a member or manager which keeps you personally insulated from the corporation or LLC (somewhat!). In the business world, the owners are the members; for an SDI you are the manager.

The LLC is formed and purchased by your IRA. Its sole purpose is to invest the IRAs money. (That money is not yours, it is your IRAs until you withdraw it at retirement age and pay the taxes on it!) Once the LLC is formed, you open a business checking account for the LLC with you as the manager. Your Trust company then wires the money from your IRA to your LLC checking account and now your LLC has checkbook control of the IRA funds. For clarification; while income from your investments would be deposited into your LLC checking account, yearly contributions to your IRA or personal withdraws would be handled through your trust company for reporting purposes.

Let’s say the LLC buys a duplex for $75,000; you write a check out of the LLC checking account for the purchase. The home needs some repairs to make it rentable so you hire a contractor, and when he is finished you write him a LLC check for his work. You now get renters, they pay you rent which is directly deposited into the LLC checking account. This type of SDI gives you, the investor, the most freedom, but also the most opportunity to mess things up. While there are many, many rules about this type of investment, if you keep the following two basic rules in mind, it will answer many of the questions that people have about breaking the rules.

Rule number one, the LLC can not do business with you (the person that put the funds into the IRA) or any linear relatives (mother, father, children, grandchildren etc...) and it can not benefit anyone other than itself. For example, in the new duplex you just purchased above, you can not stick your mom in one side of the duplex and your son in the other as they are completely excluded from having anything to do with any part of your IRA investment because they are linear relatives (and besides you should never do business with family!). No one can benefit from your IRA investment other than your IRA and/or LLC. When a rent check comes in, it must go directly into the LLC account; you can’t take any of the funds and use them personally. You can’t have your cousin (who wouldn’t be excluded from renting one of your units because he isn’t a linear relative) that is without a job, pay less rent until he gets on his feet. He would be benefiting from your IRA. However, if he paid the same full rent as the other tenant, you would be breaking no rules! You can buy a commercial building and rent it to your uncle’s company for fair market rent, but you can’t rent it to yourself for your company, even paying fair market rent because you are obviously excluded.

Rule number two, the LLC can not benefit from you personally. In the above duplex, notice I said that the duplex needed work and we hired a contractor to do the work. If you did the work yourself, you would be adding value to the duplex and thus it would be benefiting from you personally and breaking the rules. There are some grey areas here, but if you what to maintain your tax deferred status and avoid taxation and penalties, don’t chance it! If your duplex had a few weeds in its flower beds, by spraying them with weed killer that the LLC purchased, you aren’t raising the value of the property and you could probably do it without a problem, but I have a gardener do it to insure I don’t break any rules (and I don’t do weeds!)

When a tenant moves out the cleanup and spot painting is typically minimal and doesn’t raise the value of the property, however I have a service do it because that is the maintenance of the rental and a business expense. I can make much more per hour running my business interests than spraying weeds or cleaning up after past tenants. You can’t personally buy anything, work on anything, or personally pay anyone for work done on your IRA investment.

Property management and having a property manager is a necessity for larger property owners, because the more units, the more management services that are needed. If you have one duplex or triplex, a handyman and a part time book keeper can take care of pretty much everything and their fees would of course come out of the LLC checkbook.

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