Checkbook Style IRA owning an LLC? Worth it?

I have read a ton, listened to experts on their sales pitches, and amd curious of how many people out there are actually using the IRA owning the LLC type approach.

Some that come to mind are ‘The Ark’ and ‘Checkbook IRA’… Both have very legitimate arguable points to the average person. (Both are quite a sum of money to work with, but if it can save you that much on the first deal, it is well worth it to me. )But… that is where I want to get the expertise from the CPA’s and Lawyers on here.

To me, having a single LLC that is holding all of this money, that your IRA ‘invested in’ seems like you’re having pretty much your entire bunch of eggs in one basket. How would this work if the LLC were to be sued?? I can see if the LLC wasn’t set up correctly, me as the manager getting taken to the ringer, plus all of the LLC’s assets which would technically include everything the IRA has invested in, correct?

Also, I have heard to transfer your IRA to an elder and state yourself as the beneficiary. While this does sound very nice, I’m wondering how this would be impacted if the elder were put into some sort of assisted living. Everything I have ever heard is that all assets the individual has would be liquidated to cover the costs of such an incident before medicare etc… would take over. Would this be true?

I would like to hear some experts on this matter… Plus, if this is an actual logical and safe method, could someone lead me to the light on how to get this started, and what is the correct way to implement.

Thanks you!

LLCs owned by an IRA are subject to all the IRS regulations regarding IRAs. Prohibitted transactions, self-dealing, restricted individuals and unrelated business taxable income all apply. My personal opinion is the Ark is too expensive and very agressive. They do talk the talk and back up what they say to a point, but I have yet to see a private letter ruling from them that says their techniques are IRS approved. I wouldn’t want to be the test case.

Keep in mind that this type of LLC cannot use leverage to purchase property without being subject to UBTI. Many people use the SD IRA as a hard money lender or an investor in tax lien certificates or private placements or funding for private companies or start ups. They don’t use it as a managing vehicle for real estate or a business. Some people direct all the LLC investments into a c-corp that is owned less than 50% by the IRA owner. This structure isolates the IRA money from the IRA and the c-corp is not subject to any of the IRA restrictions.

I would not use an IRA to invest in anything that can generate liability for the LLC. I would set up some kind of limited liability entity to act as a buffer. I have never heard of this elder thing you mention, but it sounds like a fradulent transfer since you aren’t truly giving the assets away.

All that being said, I have a few self-directed IRAs and they are well worth the cost and expense of having.

This brings to mind a recent conversation I had with a Client Service Representative with Guidant Financial Group. Their website states “Guidant’s Audeo is a self-directed retirement structure that permits individuals to actively invest their retirement funds into a business or franchise without taking a taxable distribution or incurring penalties. Utilizing your IRA as a funding source for new or existing businesses adds significant advantages over debt type financing. Because retirement funds can be structured as an investment into the business, there are no corresponding debts that increase business overhead. For a business owner this means; more funds available for investment back into your company, higher success rates from more available cash, and your business’ success results in significant tax-deferred retirement growth.”

Just curious if anyone out there has used this approach or traded with this company. Their $4,995 fee for setting up the C-corp and rolling over the retirement funds seems a little pricey.

Rip Off! Roll-overs are free and very easy to do yourself. They are just setting up a regular c-corp where the IRA owner and related parties own less than 50%. I can’t tell if the IRA lends money to the c-corp or is issued shares. Either way it’s not worth 5K when there are others that can do the same for less.

Pricey isn’t the word. BLL hit the nail on the head. R-I-P-O-F-F.

Thanks for your feedback. Reading a bit more on this company, they propose to:

  1. Form a corporation
  2. Have the corporation sponsor a 401(k) plan
  3. Roll over my retirement funds to the new 401(k) plan
  4. 401(k) plan invests in the Corporation; in essence my retirement funds are capitalizing my new business

I really DO like the concept. But I would appreciate any recommendations for parties (attorneys, accountants, CFP’s etc) that don’t charge so high a price. I’ve never done this and don’t want to fall prey to someone fleecing me for what seems to be a bit of routine paperwork for estate planning professionals.

How much is the annual charge for maintaining this house of cards? Have they provided a private letter ruling from the IRS that says this set up complies with current tax laws?

The annual charge is $800. They tell me that the letter will be included in the deal. Here is more elaborate info that I transcripted from an audio I received in the mail. This can also be heard on their website.

Interviewer: I understand that there are rules about self-dealing with regard to your retirement account. Does this mean that you cannot work for the business?

Interviewee: We should start by explaining a little bit about the prohibited transaction rules. Although your retirement funds can be invested in anything except life insurance contracts and collectibles, there are rules to prohibit individuals from using their retirement account to benefit themselves now. If you wanted to invest in a business where you and your retirement account own 50% or more, then you’d normally be prohibited from working for that business and drawing a normal salary. This is not the case for Audeo clients. In fact, Audeo clients have to work for the business in order to qualify for the 401(k).

Interviewer: That’s interesting. Why would you say this?

Interviewee: Well, just like there are rules for prohibited transactions, there are also exemptions to these rules. Now one particular exemption allows for the purchase of a certain kind of company stock called “qualified employer securities” that can be purchased by a qualified plan. The intent of Audeo is not to provide benefit for the individual now. Our clients are all capable of getting a job, working for someone else and getting a check. Audeo’s intent is to provide a great investment for our clients’ investment accounts. Our clients sleep better at nights knowing their investments are within their control. They have the ability to affect how well those investments perform. This just isn’t the case with stock market investments…The exemption that Audeo uses is the same exemption that is used for employee stock ownership plans…Congress provided for this specific exemption specifically to allow for business funding from retirement accounts.

Interviewer: Qualified employer security and qualified plans; could you talk a little bit about those terms and what they mean?

Interviewee: Well stock of a company must qualify for the specific exemption in the ARISSA code. As part of the Audeo process we file the corporation or work with the client’s existing corporation to insure that the proper steps are followed for this stock to be qualified. In addition, we also create a specialized 401(k) plan that must have special verbage and structure in order to qualify to purchase this stock.

Interviewer: How can an investor or entrepreneur insure that they meet those requirements?

Interviewee: That’s where Guidant comes in. Our business is setting up the entities, businesses and retirement accounts that enable this type of investment purchase inside of a retirement account without incurring penalties or taking distributions. We do all the heavy lifting for our clients because this is our area of expertise. As part of the Audeo process, we also include time with an outside attorney that provides a secondary pair of eyes to insure that all of the steps are followed for the plan and the stock to be qualified.

Interviewer: I guess one of the options is I can pay my personal attorney to get educated on ARISSA laws and I can pay my personal accountant to get educated on ARISSA laws and maybe they can give me a solution that might work like this product. So I guess I’m curious. What does the IRS have to say about these retirement accounts?

Interviewee: Good question. Every Audeo plan is structured with a 401(k) retirement account. Every 401(k) plan we structure receives an IRS determination letter that verifies the plan is approved by the IRS and is considered qualified. We have a unique plan that has been modified and approved by the IRS to allow for investments and to qualified employer securities.

I would first like to “second” BLL’s comments. He’s right-on. Next, I’d like to opine that nothing beats the KISS principle (keep it simple, stupid). I’ve lost track of how many attorneys have “verified” that something or other is valid only to be left holding the bag at the end of the process. An attorney’s opinion is worthless in most prospectus’s. Why do you think I’m an “Old Guy”? Been there, done that!

FYI, self-directed Trusts DO work. My wife and I have several and they work great. They do cost more than the brokerage sponsored IRAs but your options are enormously greater (BTW, we spend LESS than the $800 figure quoted above - shop around). Yes, I will pay more total income taxes in dollar-terms via my SDTs, but in the meantime, I defer ALL taxes on the profits. The tax dollars I ultimately pay will have lower purchasing power due to inflation. Pay no tax before its time is my motto.

My biggest concern is that the company must sponsor a 401 K plan and take on all the expense and headaches of running it. The initial set up is expensive and the annual maintenance is expensive. The company must front money to fund the plan initially and then the participant/owner can transfer existing assets into the plan. Transferring assets to an SD IRA is faster and simpler without all the headaches.

How will the plan managers justify investing all the plans assets in the sponsoring company? A 401 k is not a vehicle for funding a business. It is a vehicle to build retirement assets for the plan participants. I would very much like to see a PLR where the IRS agrees that investing 100% of plan assets in the sponsoring company is compliant with the tax code. Does the SEC has any authority here?

That being said, using excess cash from a business to create a retirement plan is a great way to save taxes and diversify holdings. I think this idea is too expensive and too risky given the others ways to use retirement savings to fund a new business.

401(k)'s generally also require an annual 5500, anti-discrimination tests and other headaches. I can’t imagine they cover this in their $800/yr.

and I find it hard to believe that they have a private letter ruling stating that this has IRS approval. A determination letter is not the same thing. the question here is not the plan setup, but the plan investments and the restrictions on prohibited transactions.

they’re working awfully hard to sell this thing. if it’s truly a good deal it should sell itself.

things that sound too good to be true usually are.

I very much appreciate everyone’s input on all this. This is a great forum.