The self directed IRA LLC is a newer type of self directed IRA account that really came into light after a big court case known as Swanson v. Commissioner back in 1996. That landmark case created the legal backdrop for what became the self directed IRA LLC structure.
Note that the structure used in the Swanson case was not an LLC, but rather a Domestic International Sales Corporation (DISC). The important part, though, was that through this case it was determined that a new entity which is formed – and then purchased in entirety by an IRA – is not considered a disqualified party. Since there were no shareholders when Swanson’s IRA purchased the company’s stock, it was not considered disqualified. For more on the case, visit our Swanson v. Commissioner page.
How the Self Directed IRA LLC Structure Works:
Essentially the self directed IRA LLC structure works as follows:
- A new IRA account is setup with a self directed IRA custodian
- Funds are rolled over from old retirement accounts, into the new self directed IRA account
- A new LLC is created
- The self directed IRA purchases the membership units of the new LLC
- The funds are now held by the LLC and ready to invest
Investing with a Self Directed IRA LLC
Investing with a self directed IRA LLC is much easier than investing with a plain self directed IRA custodial account. With the self directed IRA LLC structure your funds are held in a normal business bank account, and available to invest at your discretion. As the LLC manager, you are able to sign contracts and write checks on behalf of the LLC. So investing with a self directed IRA LLC is just like investing with any other business.
The speed at which you can authorize investments opens up a slew of investment options that might be overly difficult to conduct with a custodial account (ie buying foreclosures and tax liens at auction, etc.). At the same time, the increase in control can also get investors into trouble – so make sure you have a firm grasp on the rules governing self directed IRA investments before investing with a self directed IRA LLC. As always, if you are unsure whether or not an investment is a prohibited transaction seek professional advice BEFORE initiating the investment. The penalties for entering into a prohibited transaction are severe.