So you’ve decided to fund a single-member IRA LLC / Checkbook IRA. Now what?
If you are like many others, the process of creating an IRA LLC can seem vague at best and near impossible at worst. While much of the confusion comes from the varied processes of the self-directed IRA administrators, there are some foundational steps that if understood, can make the process of funding your IRA LLC a walk in the park.
While the process is fairly straight forward, on average it will take roughly three to six weeks to accomplish. However, it’s been accomplished in less than a week by the well prepared.
The first steps in acquiring your intended investment through the IRA LLC structure are as follows:
Select a self-directed IRA provider and establish an IRA account
While it may come as no surprise, not all IRA account providers allow for this type of investment. In fact, the larger providers (Vanguard, Charles Schwab, and Fidelity) avoid alternative investments altogether. However, there are a handful of alternative IRA investment providers (self-directed IRA providers) who do allow for the IRA LLC investment.
Before choosing a provider, you will want to make sure it’s a good fit for you. Some things to consider are transaction and ongoing administration costs, investment options available to you, client support, experience/education of the firm, as well as reputation. Due diligence here is key, I’ve seen some providers shut down completely out of the blue taking their clients cash with them. Accordingly, you will find a list of due diligence questions to ask your potential provider in the resources section of this book.
With regard to the IRA LLC investment, some initial questions you may want to ask your potential self-directed IRA provider include:
1) Do you allow for single-member LLC investments?
2) What is the timeframe to fund a single-member LLC?
3) What documentation is needed to fund a single-member LLC?
4) What is the process to fund a single-member LLC?
5) What are the costs to establish the IRA, fund the IRA LLC, and ongoing maintenance?
6) What are my responsibilities for annual valuation reporting?
7) Do you allow for additional funding to the IRA LLC if needed?
8) Are there any special rules that I need to be aware of when pursuing this strategy?
Once you’ve found your provider the account opening process is generally pretty straight forward. The application packet will typically include all of the documents needed to 1) establish the IRA, and 2) get you started in funding your newly created IRA account.
Be aware that some IRA providers may charge a nominal account opening fee.
Funding Your IRA Account
Once the account has been opened at the provider of your choice it is time to fund it via a Contribution, Transfer, Rollover, or any combination of the three. This is generally the longest step in the process; expect 1-3 weeks on average to have funds available in the newly created IRA.
Moving funds from any qualified retirement plan (individual or employer) may be accomplished in one of two ways. The first being an institution to institution transfer, and the second being a rollover (direct or indirect).
The method you will choose will depend on a few factors including, the resigning (old provider) custodian’s process, your funding timeframe, account type (to and from), and the “once per year” rollover rule.
It is acceptable, and often common, to have multiple retirement accounts held with various custodians. In most cases, these idle accounts may be combined into one single self-directed IRA account.
!Be aware that employer qualified retirement plans such as the 401K, 403B, TSA, and SIMPLE IRA may impose restrictions on your ability to move funds from the account if you are still employed with the company. This is due to the overriding language of the plans in which the employer has adopted. Therefore, if this applies to you, it’s best to speak with your current plan administrator to find out your eligibility before beginning your self-directed journey.
Contributions are personal and/or employer deposits made to the IRA account. This is accomplished by issuing a check or sending funds electronically to the self-directed IRA custodian. Every custodian has its own procedure for this, so it’s important to check with the custodian first. Keep in mind that contributions are subject to maximum annual deposit and eligibility rules that you must be aware of. If in question, additional information on this can be found at www.irs.gov/retirement-plan, or by speaking with a qualified tax professional.
It’s also worth noting that you are allowed to make the full contribution amount (max out) to both an active employer IRA or 401(k) plan account and a personal account (IRA). This is typically done to maximize and consolidate available cash in the self-directed account for a particular investment. Again, your ability to consolidate 401(K) contributions via rollover will depend on your employer plans overriding language.
Transfers – IRA to IRA
A transfer is a direct movement of funds between your existing IRA provider and your new IRA provider. Transfers may only be used when moving funds from “like” accounts; i.e. pre-tax to pre-tax, post-tax to post-tax, etc. You are allowed an unlimited number of IRA transfers per year, they are non-taxable, and will not generate a 1099-R.
Due to the lack of restrictions on transfers, it’s common for self-directed IRA investors to have more than one IRA account held with different IRA providers/custodians; transferring cash between the accounts as needed. For example, a Traditional IRA at a brokerage IRA custodian and another with a self-directed IRA custodian which has invested in something a little more illiquid; like real estate. Profits generated from the rent in the real estate IRA may then be transferred to the brokerage IRA account to keep that money working.
The receiving (new) custodian must initiate the transfer. Work with your new custodian to start this process which typically includes completing a Transfer Request Form and returning it along with a recent statement of account from the resigning custodian. Funds will generally arrive in the new account within two weeks, however, this will vary on the method of payment (check, wire, ACH), and the sending custodian’s processing timelines. Expect one to three weeks for funds to arrive and be available for investment.
Tip (!) Keep an eye out for transfer out fees.
Rollovers – Qualified Retirement Plan to IRA
A rollover is a distribution from one qualified retirement plan, followed by a re-deposit to another qualified retirement plan. Whenever a rollover occurs the resigning custodian (old provider) will issue a 1099-R to you showing a distribution was taken in the amount of the withdrawal. Accordingly, the receiving custodian (new provider) will issue IRS Form 5498 which will show that a rollover contribution (rollover deposit) was made to the new account. Accordingly, there should be no tax implication for completing a rollover; that is assuming that the amount distributed by the resigning custodian matches what was reported by the receiving custodian and/or that the rollover contribution was made within 60 calendar days from distribution.
There are two ways in which a rollover may be processed by the resigning custodian. These are:
- Direct – A direct rollover occurs when the resigning custodian sends a check directly to the new provider for deposit to your new IRA account.
- Indirect (60-day rollover) – An indirect rollover is when the resigning custodian sends a check directly to the account holder. The account holder then has 60 calendar days to deposit these funds to another qualified retirement account.
In either case, the rollover is initiated by the account holder with the resigning custodian. Funds sent via rollover are generally processed faster than transfers, but this isn’t always the case.
This is initiated by the resigning custodian. Not every custodian follows the same process, so you will need to contact your provider to verify their requirements. Typically, you will be directed to complete a Distribution or Rollover Request Form. If a check is sent to you, don’t fret. You will have 60 calendar days from the date of distribution to deposit these funds into your newly created IRA account.
Once per year rule: You are allowed one IRA to IRA rollover per calendar year, regardless of the number of IRA’s you have. Stated again for clarities sake; one IRA to IRA rollover per year.
With that said, this rule does not apply to direct rollover, or custodian to custodian, type transactions, including:
- Rollovers from traditional IRAs to Roth IRAs (conversions)
- IRA-to-Qualified Plan rollovers
- Qualified Plan-to-IRA rollovers
- Qualified Plan-to-Qualified Plan rollovers.
If for whatever reason you rolled over from one IRA to another in the past 12 months, then you will need to move the funds to your new IRA account via Transfer.
Remember (!) Because of the many variables involved, before moving funds it’s wise to first gain a clear understanding of:
- The amount of cash needed to make your intended investment
- All of the retirement account types you currently have
- Your personal contribution limits and/or current and prior tax-year contributions made to these accounts (are you able to add additional cash if needed)
- Current account compatibility and mobility to move to the self-directed account (are you able to move cash from existing accounts without restriction and/or tax consequence).
Generally speaking, if you are moving from an employer or government-sponsored retirement plan, the movement will be a rollover. If moving from a “like” IRA account then you will generally move the funds via a transfer.
Establish the IRA LLC
This section will refer to the establishment of a “single-member” IRA LLC; whereby there will be one owner of the LLC (the IRA account), which will be managed by the IRA account owner. Know, however, that the LLC could be structured in a way to allow multiple members or partners, all pooling funds together for investment.
Before exploring the requirements needed to fund an IRA LLC entity, it is imperative to first emphasize the importance of seeking competent legal and/or financial guidance with this process. While some people take it upon themselves to establish the business entity with no problems, there are a few things which, if overlooked, could result in unintended tax consequences, or even worst, a prohibited transaction. If at least for the peace of mind, hire a tax attorney and/or competent CPA for help.
While awaiting funds to arrive in your newly created IRA account you may begin the process of establishing the IRA LLC investment vehicle. It’s important to note that any expenses incurred for the establishment of the LLC are the responsibility of the IRA account. Therefore, you may not, under any circumstances, pay these expenses out of pocket. To get around this you may need to have a non-disqualified person pay any fees, then the LLC would reimburse them once funded. Alternately, if using an attorney, it’s possible to have them invoice the LLC which would be due upon funding.
Although we will only cover the steps involved in funding an IRA LLC, know that your IRA is eligible to invest in other business entity types’ such as Trusts, Limited Partnerships, or C-corps. But remember that IRA’s cannot invest in an S-Corp, nor can they be a General Partner. Again, your tax attorney or CPA can help provide guidance on establishing the structure of your choice.
The LLC establishment process presented below is general in nature and may vary from state to state. Accordingly, this information is for educational purposes, and should not be considered legal advice.
- Choose a name for your LLC – You will want to check with your Secretary of State, or other business oversight entity, as they may have special rules about naming the entity. As a rule of thumb, the LLC name could not have the same name as another LLC on file with the LLC office. The name must end with the correct designation, e.g. “Limited Liability Company”, (LLC, LTD, etc.).
- File Articles of Organization/Incorporation – These are the basic documents required to create an LLC and may be called a few different things (certificate of formation or certificated of organization, etc.). Each state has its own specific requirements so make sure to check with your state first. Certain states will also require public notice in a local newspaper to make the business formation official. Again, your state’s governing office should be able to provide you with information on this process if applicable.
- Pay Filing Fees – These fees will vary by state and must be paid by the IRA or other non-disqualified people.
- Draft Operating Agreement and/or Membership Offering Documents – Depending on the structure type you will need to produce operational documentation for the business entity. While there are a number of free template agreements found on the web, there is very specific language which must be included and/or omitted in order to stay out of trouble. This generally pertains to disqualified persons receiving personal compensation/benefit, but it may also make mention to adherence to the guidelines found in IRC 4975. Make sure you’ve had your attorney look over them prior to proceeding.
○ Certain investments which have not yet been recognized by the Federal Government as legal will be scrutinized by your IRA custodian; cannabis-related investments for example. Therefore, when drafting the operating agreement, it’s a practice to leave the investing activities of the LLC as vague a possible; not mentioning the specific investment activities of the new LLC, i.e. cannabis, as many custodians will not facilitate investment in this industry.
○ At a minimum, your Operating Agreement and/or Subscription Agreement will include the following:
- Table of Membership
- Members’ percentage interests in the business
iii. Members’ rights and responsibilities
- Members’ voting power
- How profits and losses will be allocated
- How the LLC will be managed
vii. Rules for holding meetings and taking votes, and
viii. “Buy-Sell” provisions, which determine what happens if a member wants to sell his or her interest, dies, or becomes disabled.
- Registered Agent – More than likely you will need to choose a registered agent for your business entity. This is the individual who is the designated person to receive legal papers and notices in the event of a lawsuit or other action against your entity. While the manager may be the registered agent, they don’t necessarily need to be. There are third-party providers who can provide this service for a fee.
- Name a manager of the LLC – In the case of the checkbook control structure (IRA LLC), the IRA owner is generally named as Manager, however, this can be anyone.
- File the necessary forms with the state and/or federal agencies – Research and submit any documentation required by the state, local, or federal agencies.
- Obtain a TIN – The bank you eventually choose to house the LLC’s cash will likely need a few items from you before establishing the account. The entities Taxpayer ID Number (TIN) will be needed and can be obtained online at www.irs.gov.
- Establish a banking account – With your business entity documentation, your ID, and the LLC’s TIN in hand you should be able to establish the business banking checking/savings accounts. You may need to deposit funds in the account prior to establishing it. In that case, you may have your IRA provider issue a check made payable to the IRA LLC (e.g. ABC Widgets, LLC) and deposit those funds at the time of establishment. Not all banks will require this, but if so, remember that you may never use personal funds for the initial deposit as this will violate the prohibited transaction rules. In that case, you could make your personal capital contribution to the LLC as a partner member.
Remember (!) Disqualified persons may never pay for IRA LLC investment-related expenses.
Direct the IRA to Invest in the Newly Created LLC
- Speak with your IRA custodian to ensure you understand their funding requirements and have in your possession any documents necessary to facilitate the investment in to the newly created entity. This will generally include an Investment/Buy Direction letter, as well as some account owner disclosures and various forms provided by your self-directed IRA custodian.
- Specify funding directions (where the check or wire from the custodian should be sent/made payable to).
- Submit all documentation to your self-directed IRA custodian and work with them to ensure the transaction documentation is complete and accurate.
Tip (!) Delays in funding are commonly due to inconsistencies between the LLC documents and the custodial forms and/or incorrectly signed investment documents. Make sure the documents submitted are consistent as it relates to investment dollar amounts, membership units, etc. Also, as the account owner, you will not be signing on the investor signature line of the LLC documents. Check with your custodian to verify where you should sign the documents – generally in the margins.
Conduct the Activities of the LLC
Your role here (as manager) is to ensure that all activities which take place within this Business Entity are for the exclusive benefit of the investors who own it (the IRA account in this case). Maintaining that mindset will help to avoid conflicts of interest and self-dealing. As the IRA LLC manager your responsibilities include, but are not limited to:
- Oversee the day to day activities of the LLC.
- Due diligence and management of investment activities.
- Issue expense payments and deposit income payments.
- Properly account for the incoming/outgoing cash and assets held. The LLC may contract this out to a financial professional if desired.
- Custody all assets owned by the LLC.
- Comply with all IRS rules regarding prohibited transactions IRC 4975.
- Comply with all State and Federal regulations and filing requirements.
- Report the valuation of the LLC to the IRA provider on an annual basis. The self-directed IRA provider will typically require a third party, non-disqualified, person to attest to the LLC’s value. This does not need to be a certified business appraiser in most cases, rather someone who is “qualified” to determine an accurate value. There are a number of ways to determine the value of an LLC, the self-directed IRA custodian will need the “market value” of the LLC.
- Comply with all state and federal filing requirements.
- Various other managerial duties.
 “Rollovers of Retirement Plan and IRA ….” 30 May. 2018, https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions. Accessed 22 Aug. 2018.
 “How to Form an LLC | Nolo.com.” https://www.nolo.com/legal-encyclopedia/form-llc-how-to-organize-llc-30287.html. Accessed 22 Aug. 2018.