Same Investment Types
While the self-directed IRA LLC gives the individual more control over her IRA funds than the self-directed IRA, it is important to understand that both may be invested in the same types of investments (e.g., real estate, tax liens, notes, metals, cryptocurrency, private placements, etc.).
Same Prohibited Transaction Rules
Just like it is prohibited for the self-directed IRA owner/participant to purchase, sell, or exchange a property that she already owns to the self-directed IRA, the same is true for an IRA-owned Limited Liability Company (LLC). In other words, the same prohibited transaction rules that apply to a self-directed IRA apply to the self-directed IRA LLC.
Same Disallowed Investment Rules
whether made through a self-directed IRA or through the self-directed IRA funded LLC, the law does not permit IRA funds to be invested in life insurance or collectibles.
If you invest your IRA in collectibles, the amount invested is considered distributed in the year invested and you may have to pay a 10% additional tax on early distributions.
Here are some examples of collectibles:
- Metals – with exceptions for certain kinds of bullion,
- Coins – (but there are exceptions for certain coins),
- Alcoholic beverages, and
- Certain other tangible personal property.
Same Bullion/Precious Metals Storage Rules Apply
The IRS rules allow for investing retirement funds including IRAs in certain precious metals / bullion (gold, silver, platinum, and palladium coins or bars) meeting a minimum fineness requirement of the following:
Gold = 99.5%; Silver = 99.9%; Platinum =99.95; Palladium = 99.95%
Also, the metals /bullion cannot be stored by the IRA participant or the IRA LLC manager regardless if the investment is made through the IRA LLC instead of the self-directed IRA. Instead, the rules require the metals held in the physical possession or a bank or an IRS-approved nonbank trustee.
Same UBIT & UDFI Rules
While unrelated business income tax (UBIT) and unrelated debt financed income tax generally applies to investment made through a self-directed IRA or self-directed IRA LLC, for those investments that do trigger UBIT or UDFI, the tax will apply regardless if the investment is made using a self-directed IRA or a self-directed IRA LLC.
Unrelated business income tax generally does not apply to real estate investments (e.g., rentals) held inside a self-directed IRA or an IRA LLC as long as the property is held long term. However, if the IRA LLC or or the self-directed IRA invest in an operational business such as a clothing store or a technology company.
Here is how IRS Publication 598 Defines UBIT and a Trade or Business
Real estate purchased using borrowed funds (non-recourse loan) and held to produce investment income is referred to as debt-financed property. Property that is acquired or improved using borrowed money is considered debt‑financed. This tax applies to self-directed IRA or self-directed IRA LLCs that use borrowed funds to invest in real estate. The amount of UDFI is calculated on the profits realized through debt, based on the highest amount of leverage carried within the applicable year.
QUESTION: Can my sister in law just open a regular self-directed IRA and she can invest in real estate without having to do the LLC? Can people under 62 open this and transfer/rollover a partial withdrawal from current 401k plan? My sister in law is not yet 62 but her husband just turned 62 and received a lump sum 401k which is currently at Fidelity.
ANSWER: She will have to check with her current employer regarding being able to move existing 401k funds to a self-directed IRA, as she will probably be restricted from doing so if she is under age 59 ½, but if over she most likely will qualify.
Yes you can open a self-directed IRA without having to use an IRA funded LLC. The only drawback is the amount of fees that the IRA custodian chargers (e.g, processing, holding, admin, etc.), so be sure to discuss with them and look at their fee schedule. However, it may be less expensive for those in CA then going the LLC route because of the $800 franchise fee. For those outside of CA, the self-directed IRA LLC may be a better route especially if the plan is to invest in multiple real estate properties and/or asset types to avoid holding fees, processing fees and process timely investments since one gains checkbook control over their IRA through the self-directed IRA LLC.