Some investors aren't satisfied by the returns and safety of capital in traditional IRA investments such as mutual funds, stocks and bonds. You may wish to direct your IRA contributions to nontraditional investments, including real estate, a family farm, a horse breeding facility, a small business or any number of other investments. The law allows you to do this, provided you keep a strict separation between the assets in your self-directed IRA and your personal and non-IRA funds. You cannot commingle assets and you cannot borrow money from your IRA. You must also set up an entity and appoint a trustee to handle the transactions in your IRA for you.
Obtain a taxpayer ID number for an LLC from the Internal Revenue Service. You can do this using their online tool (see Resource section).
File articles of organization for your LLC with the Secretary of State's office or Division of Corporate Services in the state where you live. You can contact them by looking up your state in the Association of Secretaries of State link available in the Resource section. You can expect to pay a small fee for setting up the LLC.
Name yourself as the manager as well as the owner of your LLC. You will also need to create an operating agreement within your LLC that sets out the bylaws and procedures that will govern how you run the company. It is important to work with an experienced attorney on this point, because most "off-the-shelf" LLC operating agreements are not designed for the unique needs of the self-directed IRA LLC.
Name a new custodian. For self-directed IRAs, you must select a custodian who has been approved by the IRS to act as a custodian for self-directed IRAs. This is a very technical field, and one mistake could get your whole self-directed IRA disallowed, resulting in a significant tax problem.
Establish a bank account for the LLC. Remember, the LLC, not you, is the owner of the bank account. You just control the account as the manager of the LLC.
Direct your existing custodian to transfer your IRA assets to your new LLC's bank account. Once the funds are there, as manager of the LLC, you can write a check to purchase whatever investment you wish for your LLC.
Remember, you cannot mingle IRA and non-IRA assets in the same bank account, nor can you borrow money from your self-directed IRA. In addition, you cannot invest in real estate that you use, or plan to use, for your own benefit, nor can you use your IRA to purchase real estate from your immediate relatives.
- Code of Federal Regulations. "§ 1.408–2 Individual Retirement Accounts," Page 523. Accessed June 24, 2020.
- Internal Revenue Service. "Traditional and Roth IRAs." Accessed June 24, 2020.
- U.S. Securities and Exchange Commission. "Investor Alert: Self-Directed IRAs and the Risk of Fraud." Accessed June 24, 2020.
- Federal Deposit Insurance Corporation. "Insured or Not Insured?" Accessed June 24, 2020.
- IRA Association of America. "Custodians, Administrators, and Facilitators Demystified." Accessed June 24, 2020.
- Internal Revenue Service. "Publication 590-A: Contributions to Individual Retirement Arrangements," Pages 33-34. Accessed June 24, 2020.
Jason Van Steenwyk has been writing professionally since 1998. A former staff reporter for "Mutual Funds Magazine," he has been published in "Wealth and Retirement Planner," "Annuity Selling Guide," "Registered Rep." "Bankrate.com" and "Senior Market Advisor." He holds a Bachelor of Arts in humanities from the University of Southern California.