You are required by the Internal Revenue Service to have a third party custodian for your retirement funds. However, by using a Self Directed IRA LLC the custodian will only hold a few hundred dollars in your custodial account. The bulk of your funds will be held in an account you will establish at a local bank of your choice under the name of your LLC.
Custodians must be approved by the IRS to act as custodians.
Banks and brokerage companies are the most common IRA account custodians. Though they will advertise Self Directed IRA’s, they will limit your investment choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments. It is in their own self interest to do so because they make additional fees from the sale of these types of investments. They will generally offer only their own captive products as investments to their Self-Directed IRA account holders. This severely limits the investment choices you have available.
If the option of using tax-deferred funds to purchase investments, property, mortgages, tax liens and other alternative investments such as International Real Estate in your retirement planning sounds appealing, you will need to use an independent IRA Custodian that permits truly self-directed IRA investments.
By using an independent IRA custodian that does not offer affiliated investment products, you will have the ability to direct your retirement funds invested to any qualified investment that meets your investment requirements without institutionally imposed arbitrary restrictions… including your own Self Directed IRA LLC.
The IRA account holder cannot serve as the custodian of his or her own account. It’s important that you select a custodian that will allow truly self directed IRA’s or you will need to start the process again with one that does.
The custodian will hold the membership units in your Self Directed IRA LLC on behalf of your IRA. Your LLC will be owned by your IRA. For example: the ownership of the LLC will be “XYZ Trust Company FBO John Doe IRA Account# XXXXXXX. (FBO means “For the Benefit Of”).
Fees can vary widely among custodians, as can the flexibility of the services provided to account holders. Not all Custodians will allow investments in Self Directed IRA LLC’s. Why? Simply Self Directed IRA LLC’s do not generate sufficient transaction fees for the Custodian
With an ordinary self directed IRA the custodian directly holds title to the real estate on your IRA’s behalf, but does not service it (collect the rent, etc.), you will have to additionally contract with other providers such as a property management company. However, be sure that all rents are paid to the IRA and that all taxes are paid by the IRA.
It should be noted that the above only applies when the IRA directly owns the investment property in the custodial account – it does not apply when using a Self Directed IRA LLC to make your investment.
When using a Self Directed IRA LLC the LLC will hold title to the property and you as Manager of the LLC can manage the property, collect the rents and pay expenses.
IMPORTANT NOTE: Custodians will not set up your LLC. They will only set up your Self Directed IRA custodial account.
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