How does a self-directed IRA LLC work?

General Questions
#1

I understand how the self-directed IRA works. Within certain guidlines you can invest in whatever you want. But how does the SDIRA LLC work? From what I gather, you set up an LLC. The IRA invests in that LLC while the LLC (under your ownership) makes deals. I gather the main two advantages are lower transaction costs and immediacy in purchacing an asset.

But if the LLC gets taxed, what is the advantage or do you run it so that expenses = revenue? But then what is the difference between owning an LLC and an SDLLC? Is there a limit on how much money the LLC can invest (i.e. the same cap as investing in an IRA). Can the LLC buy an asset from you (a regular SDIRA can’t) or get around any of the other SDIRA limitations like buying a wine collection?

#2

Most of the assets in any IRA are themselves taxed. For example, if you own any stock in an IRA, those companies pay income tax on their earnings. The tax-free element comes in that when you receive dividends, you aren’t taxed on them. Likewise, when you sell the assets, no capital gain tax is recognized. Investment-type income is what receives the special tax-deferred gains.

An LLC can be taxed as a pass-through entity, though. Doing that would meant that the IRA might have unrelated business income. For example, if the LLC manufactures widgets, the widget income is unrelated business income. There is a tax to the IRA on the unrelated income.

Anyway, the difference between an LLC and SDLLC is that the latter is owned by an IRA. In fact, I would say that the term SDLLC is misleading - it’s a self-directed IRA that happens to own an LLC as its assets. The LLC is no different than any other. it’s just that its owner is an IRA rather than a person.

There’s no change in how much money you can put into the IRA. Those limits are set regardless of what assets the IRA holds The real point is to use money you already have in an IRA through the company, since you wouldn’t want to pay tax and penalties by withdrawing money from an IRA to use in an outside LLC.

I don’t know if the LLC can get around the limits usually applied to the kinds of assets owned by an IRA. It seems to me that it probably could. However, you come back to paying unrelated business income tax on non-qualified kinds of income/assets. It definitely doesn’t let you get around the rules against benefiting from the investments - you couldn’t buy your car or house through the LLC/IRA.

#3

So it sounds like if i want to invest in let’s say rental properties, the profits (like rent and appreciation) are tax-deferred or even non taxable if the IRA is a Roth. I’m assuming that others could have their IRA invest in the LLC right. For example, when my son starts working at 16, I could set up a self-directed Roth IRA for him and have that money put into SaintCad LLC.

And of course hire an accountant when it comes time to distribute to my Roth and leave his alone.

#4

That’s the basic principle, yes. The devil, as always, is in the details and you’d want an accountant with a lot of experience in this kind of thing. I don’t deal with these issues much myself - I know the broad strokes, but I refer those kinds of returns outside.

#5

Last question (I promise)
Self directed IRA (and the LLC I assume) cannot by assets from the IRA holder so for example SaintCad LLC cannot buy my car because of the personal benefit exclusion.

Suppose I want to put some assets into the LLC that I own personally. Currently there is no capital gains since they haven’t changed value so I’m not looking to escape a tax liability, its just that I prefer the IRA have the asset rather than me. To make it easy let’s say it’s stock in a private company with par value $100. If the stock goes up next year (like an IPO), then it would greatly increase in value and I want the profit then in my Roth and not personally.

If I sell the asset to someone else then the LLC buys that asset, would this be illegal or a loophole? Is there a time element involved (like a year?). Would I end up paying tax (non existant) on that transaction or the whole thing and then it’s OK? Is that a tax attorney or a accountant type of question?

#6

Anything you wanted to put into the company would be put in through the IRA unless you have a scenario where the IRA owns x% and you own y%. (I’ve seen this done with corporations funded through a 401k. The shareholder has to own less than 5% in that case.) So this limits what can be put in.

But you’d definitely want to direct the question to a lawyer/accountant who specializes in that area. Advisers who specialize in this not only know the public information well, but may have obtained private letter rulings, which gives them an advance opinion from the IRS about a situation that is not clarified through law, procedure, ruling or court precedent.

Of course, some of the people selling specialized tax products are not as ethical as you might expect. If something sounds too good to be true, it may very well be.