Our clients are sometimes curious about how IRAs and LLCs work together. Many clients ask if their self-directed IRAs need LLCs to invest in alternative assets like real estate, precious metals, or promissory notes. An IRA does not need an LLC to purchase alternative assets. The IRS legally allows retirement accounts to invest in any asset except for life insurance or collectibles. However, some IRA investors do utilize LLCs with their retirement accounts to exercise a greater degree of control over their tax-advantaged funds.
The most common relationship between self-directed IRAs and LLCs is for retirement investors to open and fund LLCs within their accounts, at which point the entites become assets owned by their IRAs. Like other self-directed IRA assets, an LLC in an IRA can have combined investors. The IRA can partner with other investors on the LLC investment, regardless of whether they allocate retirement or non-retirement money.
To own an LLC with an IRA, many account holders establish what is called a "checkbook IRA". Though an investor can own all or part of an LLC without a checkbook IRA, this account structure can make it easier to open and manage the entity. "Checkbook IRA" is simply a descriptive term; Traditional IRAs, Roth IRAs, or any other self-directed retirement accounts can feature checkbook control.
An investor may choose a checkbook IRA to enjoy the speed with which funds can be disbursed and to avoid transaction processing fees. Once the IRA buys 100% of the LLC or entity, the majority of the work and responsibility for investments shifts to the checkbook IRA account holder, who is also the entity manager. The purchase, sale, and management of assets within the IRA-owned LLC can proceed without custodial oversight over every individual activity, so transactions can typically be accomplished quickly.
While owning an LLC in a checkbook IRA can provide some flexibility for investors, it requires greater responsibility on the part of the IRA holder. The LLC or entity will need a bank account, tax ID number, financial books, filing systems, and accounting/recordkeeping. For many clients, allowing the IRA custodian to handle transaction processing is well worth the associated fees. It is up to the LLC manager to understand and abide by all the IRS rules pertaining to IRA investing.