Solo 401k vs IRA LLC

While both the IRA LLC and the solo 401k can be self-directed–that is, the account holder can place alternative investments (e.g., real estate, notes, private investments, etc.) by writing a check or by wire, the solo 401k is generally preferred over the IRA LLC because it is both less expensive and less paperwork extensive.

However, not everyone qualifies for a solo 401k because you have to be self-employed with no full-time employees in order to be eligible. On the other hand, self-employment is not a requirement to to invest an IRA in an LLC. The IRA LLC is commonly used by those who do not meet the solo 401k eligibility requirements.

A self-directed solo 401k comes with checkbook & wire control provided it is opened through a solo 401k provider whose plan allows for it, and the business owners is the named trustee of the solo 401k plan. The IRS rules permit the business owner to serve as trustee over his or her solo 401k funds, with the exception of cash and metals, which like the IRA LLC must be held with a depository taking institution. See the below IRS link and language that confirms the Solo 401k business owner is authorized to serve as trustee of his or her 401k funds.

IRS Language

“Trusts and trustees. 401(k) plans are funded through a trust established to hold and invest the plan’s assets. At least one trustee is appointed to have responsibility for the activities of the trust and its assets. This is a serious responsibility with considerable potential for liability. Trustees might include the business owner, an employee, or a financial or trust institution.”

http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401%28k%29-Resource-Guide—Plan-Sponsors—Starting-Up-Your-Plan

IRA LLC

With an IRA LLC, to  gain checkbook control over your IRA the self-directed IRA has to be invested in an LLC where the IRA is the member and the IRA participant is the manager. Once the IRA LLC has been funded, investments are placed through the LLC bank account not the self-directed IRA.

A self-directed IRA may be invested (called units or membership interest) in a limited liability company provided the purchase does not run afoul with the exclusive benefit rule or the IRA prohibited transaction regulations. The same prohibited transaction rules that apply to self-directed IRA apply to an IRA LLC (also known as a checkbook IRA).

An  LLC  where the sole member is a self-directed IRA is deemed a single member LLC (Self Directed IRA LLC) for tax purposes which means the LLC is not required to file a federal tax return. The self-directed IRA is only required to file a tax return (Form 990T) if taxes are due (e.g. UDFI or UBIT).

While an IRA LLC is not required in order to invest in real  estate, many IRA owners find it a good idea for the following reasons:

  • Reason one: While IRAs are afforded bankruptcy protection under federal law, not all states afford IRAs creditor protections. As a result, an IRA is often invested in an LLC for protection from  creditors.
  • Reason two: Reduce IRA custodian fees since investments are made through the IRA owned LLC.
  • Reason three: Reduce IRA custodian involvement since the IRA owner is the manager of the IRA owned LLC.

Keys to a Compliant Self Directed IRA LLC Operating Agreement

Require the IRA LLC facilitator to include the following pertinent items in the LLC operating  agreement and to leave out terms to the contrary.

  • No compensation may be paid to the manager of the IRA LLC if the manager is the IRA owner or a disqualified party.
  • If the IRA/LLC manager is the IRA owner or a disqualified party or the manager, include language that specifies the manager may not receive compensation for managing the LLC.
  • Include language regarding UBIT and UDFI triggers.
  • Include language regarding disallowed investments.
  • Include language regarding what happens in the event of death of IRA owner.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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