How to form an IRA owned LLC for investing

[ys91]

Jurisdiction

Colorado

Hi, I am looking to open a self directed IRA account because I am not satisfied with the offerings in my old 401Ks. I've learnt about the IRA LLC option where I can be an unsalaried manager of the IRA LLC and 100% of the units of the IRA LLC can be owned by my IRA (held by the custodian such as MIDLAND IRA, Equity Trust etc). I like this option because of the ease and convenience, and not having to pay outrageous amounts of money to these custodians who charge annual fee per asset.


My question is about the process to get this set up. I've been looking online and couldn't find any DIY help in this. I know setting up an LLC is a relatively simple process, especially if its just going to be a holding company, which in this case it will be. I plan on having a few different asset classes such as private placement (loans), brokerage account(s) and perhaps peer to peer lending account. Instead of paying ~250/yr/asset, I like the idea of just having the IRA LLC as an asset within the IRA on which I pay 250/yr and all investments can be held within the IRA LLC which I can then manage, such as operating the brokerage account, underwriting, P2P lending note selection/investment, etc. While I am not considering holding mortgage/rental property at this time, this could also be another benefit of an LLC.

I am hoping to find some help in how to go about setting this up. I understand that I can't be involved in any "transaction" etc because it'd be prohibited, so things like paying the IRA LLC state filing fee etc all needs to be done by the IRA and not by me.

What I don't get is the "HOW" (assuming the above is correct). The way I see it, some of the steps I've been able to understand are:

1. Open up an IRA with one of the custodians/trusts out there and rollover money from old 401Ks directly into this IRA, so it doesn't count as distribution. I think this is relatively easy.

2. Obtain the account number for the new IRA. Say, "XYZ Trust FBO FIRST NAME IRA ACCT NO 12345"

3. Set up the IRA LLC, which will be single member, wholly owned by the "XYZ Trust FBO FIRST NAME IRA ACCT NO 12345"

4. The manager will be me, so I can make investment decisions.

5. I don't understand how the state filing fee will be paid by the IRA. Most state LLC filings are online, and payment (I think) are required at the time of filing.

6. I am looking to form the LLC in Colorado due to no minimum annual tax and low filing fees as well as low annual filing fee. The payment is required at the time of the filing and can be either a credit card or a prepaid account. I have no idea what the prepaid account is and how to fund it, so totally unsure of this. Using my own credit card would (at least I think it would) trigger a prohibited transaction.

At this time, I am a bit confused as to how this can be accomplished, assuming I have the custodian/trust IRA account set up already and all that needs to happen now is the filing of the LLC. Also, not sure if the filing for this kind of a thing has to be online or by mail. I mean if the actual signature is needed, then would it be required that the custodian sign and send the completed forms on behalf of the IRA, as the LLC will be wholly owned by the IRA.

I'd really appreciate your help!

 

[Michael Wechsler]

I'm going to be very honest with you - what you describe is best handled by a professional tax adviser such as an experienced accountant, tax attorney or potentially an estate planner. There are so many issues that can be related, including the fact that you seem to be the resident of a state other than Colorado and choosing to forum shop for preferential tax treatment. State and federal governments may be slow but they aren't completely clueless. Compliance with all the steps, rules and regulations is essential.

Setting up an LLC is simple from my experience. The fee getting paid is always required and the state doesn't really care who pays the money so long as it is paid. But the real issue here is the issue of who is controlling these companies. You can't set up shells and pull the strings like a puppeteer. A little research online regarding a Self Directed IRA Account (not from my favorite place) seems to indicate that this is the case - and it makes sense:

Internal Revenue Service (IRS) regulations require that a qualified trustee, or custodian, hold IRA assets on behalf of the IRA owner.

As a result, you may not be able to avoid paying someone to serve as a qualified trustee or custodian. This does not seem to be a path that is normally undertaken by those trying to do it themselves. If you want to avoid grief in the long run you're probably best served by making a solid initial investment with someone who has expended much time to really know how this works. Learning what you may have done wrong later can be exquisitely painful, especially when you're dealing with assets of the size you're talking about. No point in being penny wise, pound foolish. Good luck.