Take the Reins of Your Retirement Investment Strategy

By Robert Steere, Toolkit Staff Writer

Are you satisfied with the current performance of your retirement accounts? Are you getting the investment returns you hoped for? Is your custodian or investment manager providing you the service you expect without charging you an arm and a leg? Then perhaps you needn't read any further.

But if you are harboring doubts or concerns about the way your retirement funds are being handled, or if you want to take a more active role in the decision-making and the choices that will affect the success of the investment strategies securing your retirement, then you will want to read on to learn about a new and emerging trend in self-directed investment of your retirement dollars.

Take the Reins to Invest Your Retirement Assets

You may not know it, but you have the power to direct and manage the investment of assets in your IRA, 401k or other retirement funds. There is a growing trend among more sophisticated owners of IRAs who are taking charge of their own financial future, investing their retirement funds for themselves through an investment vehicle commonly referred to as a "self-directed IRA LLC with checkbook control."

By investing for your IRA through a self-directed IRA LLC, you, as the manager of the LLC, have direct control over your retirement funds. You make all the decisions regarding investment. If you identify an asset you want for your IRA, just write a check from the LLC's bank account to purchase it in the name of the LLC. No need for approval, no time delays and, even better, no fees to pay to the IRA custodian for making the transaction for you.

Most typical IRA account custodians, such as banks, typically limit your investment choices, even if you have a self-directed IRA, to relatively safe, common investments such as certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments.

But the Internal Revenue Code permits the assets of IRAs to be invested in a much broader array of qualified investments, including a variety of real estate investments such as commercial properties, condominiums, residential properties, mortgages, or interests in limited partnerships or limited liability companies. It also allows you to express your entrepreneurial spirit by using your retirement funds as a source of business financing to buy or start a business.

If such investments appeal to you as part of your retirement investment strategy, you need an IRA custodian that permits you true self-direction. Using a self-directed IRA LLC with checkbook control puts you in control of your retirement funds and enables you to determine how your retirement funds are invested.

Set Up Your Self-Directed IRA LLC

Here are the steps to setting up your own self-directed IRA LLC with checkbook control:

1. Establish a self-directed individual retirement account (IRA) with a custodian that will work cooperatively with you.
2. Establish a limited liability company (LLC) to be wholly owned by your self-directed IRA and managed by you (but without compensation paid to you). Having a well-crafted operating agreement that meets legal requirements will be important.
3. If you have funds in any existing retirement accounts, you may want to transfer some or all of those funds to your new self-directed IRA.
4. As manager of the LLC, open a bank account for the LLC at the bank of your choice, providing yourself with signature authority over the account.
5. Direct the custodian of your new self-directed IRA to invest in an ownership interest in the LLC you just created, and transfer the invested funds into the newly established bank account of the LLC.
6. As manager of the LLC and the one with signature authority over the LLC's new bank account, you can now invest the funds of the LLC, as you see fit, in qualifying investments, without having to seek further approval from the IRA custodian.
7. You own the IRA; the IRA, at your direction, invests in the LLC; the LLC, under your direct management and control, makes the investments you choose; you, as manager of the LLC, make the decisions, do the trades and write the checks to implement your truly self-directed investment strategies.

Summary of Benefits of a Self-Directed IRA LLC with Checkbook Control

• You can personally direct the investment of all your retirement assets.
• Once the structure is established, you can minimize the custodial and transactional fees that will be imposed as you implement your investment strategies.
• You can have greater flexibility in investment--selecting a diverse array of assets or unusual assets that fit your interest.
• You can act more quickly to invest in a particular asset to take advantage of sudden opportunities.
• You can use the same self-directed IRA LLC to invest in nontraditional assets such as real estate, personal loans or private businesses and more traditional IRA assets like stocks, bonds and mutual funds, and do it simply by writing a check, with no custodial transaction fees, and you can earn your investment income on a tax-deferred basis.
• Tap the purchasing power of your IRA before retirement age without being subject to taxes or penalties for early withdrawal.
• In short, you can manage your retirement investments with the same flexibility and control you use to manage your other general investments.

Potential Pitfalls of a Self-Directed IRA LLC

The structure of a self-directed IRA that uses an LLC as the investment vehicle is obviously more complex than a typical IRA. Higher start-up costs can be expected, and you really will want the professional assistance of an attorney, an accountant, an incorporation specialist, or other expert knowledgeable about the process to help you structure the IRA and the LLC in the proper manner.

This is a wise investment option only for those with investment acumen, a vision for what they want to accomplish with their investment strategies, and the time to focus their attention (or the attention of other professionals assisting them) on the effective implementation of their plans. If you are not prepared to take the time and effort to manage your strategy well, it may be best to choose a more routine investment option.

Furthermore, make sure that you know, or work with others who know, the requirements and limitations of the Internal Revenue Code and the regulations and rulings governing investment of IRA assets. The tax laws are rarely crystal clear, and they tend to change with regularity. Use care and caution to comply with the law as you structure the LLC and define the ownership and the management authority of the LLC.

Most importantly, you want to make sure that the investments made with IRA funds are qualified investments under the tax code. You do not want to make any investments that could be interpreted as a "prohibited transaction" under the tax code. Such transactions can arise where a conflict of interest exists between parties to a transaction, and can result from improper use of the IRA account to benefit yourself or other disqualified persons. Prohibited transactions can put the tax-deferred status of your IRA at risk.

Because the consequences of making an investment mistake can be so grave, make sure that you have the professional advice and counsel you need before taking actions that raise any doubts, questions or concerns in your mind.

Conclusion

With these cautions in mind, if you have the investment savvy, and you are ready to take greater control over the investment of your retirement assets, then setting up a self-directed IRA LLC with checkbook control may be thing for you. With the proper professional assistance, you can take the reins of your retirement investment strategy.

Posted March 5, 2010.