This short post will walk you through how to set up a self-directed IRA. It might sound complicated but as you will understand yourself 4 minutes from now it doesn´t have to be complicated at all.
A significant number of investors are not satisfied with the nature of the investment income they receive from their traditional IRA investment vehicles. The safety of the capital they have channeled into the traditional investment instruments such as stocks, bonds, as well as mutual funds, is also something that these investors are concerned about.
If you are one of the investors described above, then you can rest assured that it is possible for you to direct your IRA contributions to some of the very lucrative non-traditional investment instruments such as real estate, small businesses, or even a family farm. This is actually allowed by the law, provided that you are able to distinguish between the assets in the self-directed IRA, and all your other non-IRA funds. This means that you are not permitted to commingle your assets or to even borrow some cash from the self-directed IRA.
On the same note, you can decide to create your investment entity and to have a trustee handle all the transactions on your behalf. If this is something that you would like to do, then read through the instructions below on how you can achieve this.
How to Set Up a Self Directed IRA – 6 Steps
1. Acquire your taxpayer Identification Number for the LLC
You can get this ID by using the online tool provided by the Internal Revenue Service. The process is quite simple and should not take you long.
2. Filing the articles of organization
The next step lies in the filling of articles of organization for the self-directed LLC you wish to create. You can also do this by going to the Secretary of State or the Division of Corporate Services offices and getting help with that. You can also access the same help by visiting the Association of Secretaries of State’s website. This process may cost you a couple of dollars, but it is all necessary for you to get your self-directed IRA up and running.
3. Name yourself as the manager of your LLC
It is necessary for you to name yourself the owner of the self-directed IRA LLC. This also goes along with having to come up with an operating agreement that defines the manner in which the company will be run. All the bylaws should be clearly stated. You can do this with the of an experienced attorney, in order to curate the guidelines that perfectly suit the nature of your new LLC.
4. Appoint a Custodian
It is a requirement by the law for you to select a custodian to handle your self-directed IRA. You should check to ensure that the IRS has approved this custodian. You may be tempted to handle the operations of your IRA on your own, but that may only pose a great risk to your financial well-being. Handling all the legal bits of an IRA is way more complicated than you would imagine, which is why the law requires that you appoint a custodian to do that on your behalf. A few errors can lead to very significant financial consequences, which is not a risk that is worth taking.
5. Create a bank account for the self-directed LLC
It is crucial to recall the fact that you and the self-directed are separate legal entities. This calls for you to have a separate bank account through which all the finances of your LLC are managed. You are responsible for controlling this bank account in your capacity as the manager of the self-directed IRA LLC.
6. Direct the custodian you appointed to transfer your pre-existing assets to the self-directed IRA LLC’s bank account.
Once the custodian has executed the transfer of funds from your former IRAs (Traditional IRA, Roth IRA, SEP IRA, 401 (k), 401 (3) (b)) to your current SDIRA’s bank account, you can begin writing checks to buy any legally accepted investment to help with meeting your retirement investment objectives.
As the manager of your newly formed LLC, you have the power to state where you want your money invested. You can, therefore, begin investing in the real estate sector, various precious metals, tax liens, or any other alternative asset class.
You are also not prohibited from investing in traditional investments if that is what you prefer. At the end of the day, you wield all the power over which money goes into what asset.
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How much control do you have over your SDIRA LLC?
The level of control that you have over your newly created SDIRA LLC is definitely something that you need to have a clear understanding about. When you create an SDIRA LLC, you can expect different terms of operation from the regular SDIRA structures. One factor that distinguishes this type of LLC over the other SDIRs is the level of control that you have over your assets.
Most SDIRA IRAs have what is commonly referred to as “Checkbook control”. This simply means that you are in charge of every investment decision that requires to be made. Unlike other SDIRAs, you do not have to wait for the approval of your custodian. As soon as you discover an investment that is lucrative, all you have to do is to write a check or to make a wire transfer from the SDIRA LLC’s bank account.
Why do you need to set up an SDIRA LLC?
As of now, you can clearly tell that an SDIRA LLC presents you with the perfect opportunity to control your investments. If you do not like being in a situation in which you feel like your hands are tied in as far as your investments are concerned, then an SDIRA LLC is the way to go.
The SDIRA LLC with the Checkbook control structure has been quite popular in the past 20 years. People have preferred it due to the following two main reasons:
– It eliminates delays arising from the interaction with a custodian when seeking the approval to invest in certain assets.
– You can seize every investment opportunity that is viable as soon as it comes your way.
– It eliminates a significant amount of fees that result from having to deal with a custodian during the investment approval process.
That said, however, having an SDIRA LLC is best for you if you have a well-defined investment plan. The technicality involved with some assets may bear a significant risk of loss of your funds if you do not have a clear understanding of them. If you have already honed your skills as an investor, then an SDIRA LLC will present you with a perfect opportunity to grow your nest of investments.
You now have a better understanding of Self Directed IRAs and how to set one up, if a self-directed one is what you want. Over the years we have reviewed hundreds of IRA custodians and below you can see our top 5 list of companies that can help you through this process if you are interested in having precious metals in your IRA:
I hope you found this short article on how to set up a Self Directed IRA to be helpful and that you now have a better understanding of the subject. Please share your own experience below in the comment section and/or your questions as I would be more than happy to answer them!
I wish you much success!
founder of: Gold Retired