Let’s Talk Self-directed IRAs
by Tina Triano, Attorney

As a Certified Estate Adviser, many of my clients consult with me regarding strategies to reduce their income taxes. I often find many clients with untapped or under-utilized resources hiding away in their retirement accounts. Money that they never thought could be accessed while they are still under retirement age or in some cases after retirement. One investment and tax savings method that I have implemented with great success is the use of a self-directed IRA. A self-directed IRA used in conjunction with a limited liability company that is owned in part or in whole by your IRA can provide great investment freedom along with tax savings. An IRA/LLC allows you to have complete control over your investments and control over the checkbook – a very unique benefit.

Using an IRA/LLC structure for the sale of highly appreciated real estate (or other assets) can avoid paying capital gains taxes and eliminate the need for a 1031 exchange. Like any other IRA investment, when an IRA/LLC sells real estate or other appreciated investments, the capital gains tax is deferred through the IRA. The proceeds from the sale of the asset can then be used for new investments.

The key to a successful IRA/LLC is the IRA custodian. Most custodians do not allow you to control IRA funds, or they will restrict your investment options and in many cases require that you obtain their approval for your investments. Very few IRA custodians will permit direct ownership of real estate or other nontraditional investments by an IRA. Ironically, according to IRS Publication 590, the only investments that an IRA may not own are insurance contracts and specific collectibles. Through an IRA/LLC you can invest in a new business, an existing business, rehabbing and flipping properties, lending money to others and/or real estate investments.

Ownership of real estate or other assets through an IRA/LLC allows you to have  direct, hands on control. No custodian involvement is necessary. Since the custodian involvement is limited in an IRA/LLC, the costs for IRA custodial services are typically less than $500.00 a year. Consider how much your current IRA custodian may be charging you for managing your current IRA accounts.

An additional benefit to an IRA/LLC structure is the reduction of litigation threats since your assets are isolated in a limited liability company.

There are six basic steps to establish an IRA/LLC. Step 1: You set up your LLC, which will issue member shares (similar to stock in a corporation) including a Tax ID Number for banking purposes. DO NOT attempt to establish a standard LLC. Documents for an IRA owned LLC must contain language specific to an IRA/LLC structure. Step 2: Set up a bank account for your LLC at a bank of your choice. Step 3: Transfer your existing IRA account to a self-directed IRA Custodian. Step 4: Instruct your new self-directed IRA Custodian to transfer the IRA money to your LLC bank account. Step 5: Issue LLC Member shares to your IRA. Step 6: Invest your IRA funds.

Due to the complex structure of the IRA/LLC, I strongly advise those interested to contact an attorney or financial planner with IRA/LLC experience.

~Tina Triano Esq. is a California licensed attorney with over 15 years of trust and tax planning experience. Tina is available for group lectures and private consultations.