Seasoned self-directed investors prepare for contingencies, particularly when engaged in alternative assets such as real estate and private lending. Often this includes safeguards. Acquiring investments with a limited liability company (LLC) can provide such a safeguard, but there is another possibility as well: Self-directed, tax-advantaged savings accounts like IRAs, Solo 401(k)s, or Health Savings Accounts.
Some believe an investor must purchase real estate with an account-owned LLC to safely invest, but is this true? Below we explore.
The Benefits of Self-Directed Investing
Self-directed tax-advantaged plans carry the same tax advantages as plans sponsored by the more traditional providers, many of whom, like Vanguard and Fidelity, are all but household names. With self-directed investing, the account holder can often pursue a far broader suite of investment opportunities. While you may not be able to choose what you invest in with an employer-sponsored 401(k), a self-directed IRA or solo-401k enables you to tap into a variety of alternative investment options, including property.
Any taxes that would be otherwise assessed on investment earnings are deferred when held by a self-directed plan. A tax-advantaged account can even seek financing to obtain real estate, though it would have to be a non-recourse loan.
You can create and fund an LLC within your self-directed plan. Instead of purchasing a property directly, your account could open the LLC and supply it with tax-advantaged funds. You could then become manager of the LLC and take “checkbook control” over the money. This means you could purchase assets for the LLC without having to involve your account custodian (e.g., NDTCO). The LLC would own the asset, your self-directed plan would own the LLC, and you would hold control over all of it.
Curious about a Checkbook IRA? Click here to download our Checkbook IRA Investing Guide.
Do You Need an LLC in Your IRA?
Assets owned by a tax-advantaged plan enjoy many of the same protections as an LLC. As is the case with an LLC, a self-directed account is considered its own “investor” distinct from the account holder. Therefore, you may establish a self-directed account, purchase property without an LLC, and protect yourself by virtue of the account’s unique status.
Due Diligence is Key
You may not need an LLC to defend yourself while investing in property, but that doesn’t mean an account-held LLC won’t suit your needs. Checkbook control can be a valuable tool in directly implementing your retirement strategy, but it necessitates due diligence and responsibility on your part lest the account falls out of IRS compliance. Also, keep in mind that NDTCO does not perform any compliance or other due diligence reviews of your chosen investment. Individual states may have different laws pertaining to certain investments, so be sure to research and understand your situation.
We encourage you to speak with your financial team to determine which investment avenue may work best for you. Having your affairs in order before pursuing an investment can lend a significant hand in mitigating stress and maximizing returns.
For more information about investing in real estate with a self-directed IRA, Solo 401(k), or Health Savings Account, click here to download our Real Estate Investing Guide. For more information about a Checkbook IRA, please click here.
Feel free to reach out with any questions or concerns about whether an IRA or LLC will work for you by giving NDTCO a call at 877-742-1270 or sending us a message through the Client Portal.