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How to Put Real Estate in Your IRA?

Last update on: Oct 17 2017

Does your IRA have to be invested in publicly-traded securities or mutual funds?

Few people realize that the answer is “no.” The IRA actually is one of the most flexible investment vehicles available. An IRA can be invested in real estate, private companies, hedge funds, separately managed accounts, mortgages, and a host of other assets. But you have to know the rules and other steps to take advantage of the full flexibility of the IRA.

Many financial institutions and advisors will say that you cannot make these investments in an IRA. What they mean is that you cannot make these investments through IRAs they sponsor. The law allows the investments.

Let’s take a look at how you can make such investments through your IRA.

The first step is to set up a true self-directed IRA. Many financial institutions have IRAs that they label “self-directed.” They mean you can choose from among any of the publicly-traded stocks and bonds plus the mutual funds that the institution is able to buy. A true self-directed IRA allows you to purchase almost any legal investment asset.

There are a small number of IRA custodians that offer self-directed IRAs. You can find them by going to any Internet search engine and typing in self-directed IRA. The major ones are listed in the box on the next page.

These custodians charge more for their services than do regular custodians. In addition, there are paperwork requirements and usually additional fees for every transaction the IRA makes. These factors make the true self-directed IRA impractical for small IRAs and for IRAs making a large volume of transactions.

Even these disadvantages can be reduced or eliminated by taking another step that very few advisors know about.

You can set up a limited liability company, and have that wholly-owned by the IRA. Then all your investments and other transactions are made through the LLC. The LLC is a separate taxpayer and investor, the IRA simply owns the LLC the way a conventional IRA might own Microsoft or GE.

The LLC can buy any investment that is suitable for an IRA. But it makes the purchases through its own accounts using its own funds. Some people refer to this as the Checkbook IRA, because all the IRA investments are made through the LLC’s checkbook.

To review, here are the steps you to creating what some call the Super IRA, Secret IRA, or LLC IRA.

1. Select a true self-directed IRA custodian.

2. Transfer your current IRA assets to the custodian. You can consolidate all your IRAs with the new custodian or move only one IRA.

3. Form an LLC. This includes creating the organizational documents, registering with the state, paying the state registration fee, getting an employer ID number from the IRS, and opening up a bank account or other financial account.

4. Have the IRA invest in and become sole owner of the LLC.

5. Do your IRA investing through the LLC. You control the LLC as managing member. You can open up a regular brokerage or mutual fund account, buy real estate, or make a number of other investments.

6. Prepare a tax return each year for the LLC. There shouldn’t be any taxes due, because the LLC is a “pass through” entity taxed as a partnership. All income, gains, and losses flow through to the LLC owner, which is the IRA. The IRA, of course, does not pay taxes except on prohibited investments and prohibited transactions.

Every step in this strategy must be done properly for it to work. You should not attempt it without an experienced custodian and an attorney to help set up the LLC.  The LLC documents must have certain language to allow ownership by an IRA.  Without the language, the plan could have big problems. I am aware of two firms that help individuals create the true self-directed IRA. They are: Guidant Financial Group, LLC, 10900 N.E. 4th St., Suite 1830, Bellevue, WA 98004; 888-IRA-XCEL; www.; and The Tax Academy, 207 N. Gilbert Rd., Suite 210 L, Gilbert, AZ 85234; (800-815-0301);

An additional benefit of an LLC IRA is asset protection. In most states the LLC offers a layer of asset protection that is better than that of an IRA. The asset protection for IRAs varies from state to state, and amounts to little or no protection in some states. With an LLC even if a creditor wins a judgment against you, in many states all the creditor can do is wait until the LLC makes a distribution. Distributions often cannot be forced from LLCs. The LLC doesn’t have to be formed in your own state. It can be formed in a state with strong asset protection.

Both regular and Roth IRAs can use the LLC IRA strategy. The Super IRA plan is not restricted to IRAs. The same rules apply to virtually any qualified retirement plan. If you own a company and control how the 401(k) plan is set up, you might be able to set up a true self-directed 401(k). In addition, recent tax law changes created the single-person 401(k) plan. This allows a self-employed individual to sock away up to $41,000 in one year. Set up the 401(k) with a true self-directed custodian, and you can have these opportunities through a 401(k) plan.

Next month we’ll look at the surprising range of financial and investment moves you can make with an LLC IRA, the actions you are not allowed to take, and the pitfalls to avoid. It will be an eye-opener. May 2004. RW

Self-Directed IRA Sources

The following firms act as custodians for true self-directed IRAs. Fees, paperwork, and acceptable assets vary. Have a good idea of the investment strategy you want to use before comparing firms.

Entrust Administration
555 12th St., Suite 1250
Oakland, CA 94607
Fax: 510-587-0960

12 W. Church Street
Frederick, MD 21701

Sterling Trust
PO Box 2526
Waco, TX 76702
Fax: 254-751-0872

Lincoln Trust
P.O. Box 5831
Denver, CO 80217
F- 303-694-2107

Pensco Trust Company
West Coast:
P.O. Box 26903
San Francisco, CA 94126
(415) 274-5600
East Coast:
104 Congress Street
Suite 402
Portsmouth, NH 03801
(603) 433-2626



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