Self-Directed IRA LLC Law
What Is a Self-Directed IRA?
Self-directed IRA LLCs have been legal for more than 20 years, as validated by a series of important Tax Court decisions.
A self-directed IRA (Individual Retirement Account) is a retirement account for which you, the individual investor, are in charge of making all investment decisions. This type of IRA provides you with greater opportunity for asset diversification outside of traditional stocks, bonds and mutual funds. For example, it allows you to invest in assets such as real estate and certain precious metals.
One way to set up a self-directed IRA is through creation of an entity, such as a limited liability company (LLC). The LLC is owned by the IRA. You, the sole manager of the LLC, use this LLC’s checking account to make investments for the LLC, following tax code rules. These investments can include certain precious metals, real estate and a host of other non-traditional assets, as well as traditional stocks, bonds and mutual funds. (See Internal Revenue Code Section 408 for further guidance, particularly 408(m), which deals with precious metals.)
Legal History of Self-Directed IRAs
1974 – ERISA (Employee Retirement Income Security Act)
ERISA established minimum standards for private-business pension plans and employee benefits. It also created the legal framework for the first IRAs.
Early 1990s – First Self-Directed IRAs Created
Satisfying a demand by consumers for more control over their IRAs, some trust companies created IRAs that allowed consumers to self-direct their investments.
1996 – Swanson vs. Commissioner (106 TC 76)
James Swanson had created a special-purpose business entity owned by his IRA. He made himself the non-compensated manager of this business entity, allowing himself full investment control. In other words, his structure mirrored that of the IRA LLC discussed above. The IRS challenged Swanson, claiming that using a special-purpose entity to manage his own IRA was a prohibited transaction. The judge found for Swanson (see 106 TC 76 for details). Investing in a self-directed IRA through a newly created entity has been recognized ever since.
1996 to 2001 – Limited Liability Companies (LLCs) Used for Self-Directed IRAs
Attorneys started using the newly-legal LLC entity as “pass-through entity” for self-directed IRAs. As a pass-through entity, the owner of an LLC pays taxes, rather than the IRA itself. However, because the IRA is the sole owner of the LLC, and because IRAs are tax-exempt (Internal Revenue Code Section 408), IRA LLCs generally don’t have to pay taxes on investment income. As with other IRAs, the owner-investor doesn’t pay taxes or penalties until he or she takes a distribution. The IRA-LLC combo has since become a popular choice for self-directed IRAs.
2001 – IRS Issues Field Service Advice (FSA) Memorandum 200128011
The IRS educated its agents about the legality of self-directed IRA LLCs via FSA 200128011. In essence, the memo reiterated the Tax Court’s finding in the 1996 Swanson case that an individual can use his or her self-directed IRA to purchase all the shares in his or her newly formed LLC without self-dealing.
2013 –TC Memo 2013-245 Reaffirms Self-Directed IRA LLC Legality
After retirement, Terry Ellis rolled over $300,000 from his 401(k) into a self-directed IRA. He then established an LLC, “CST LLC,” and transferred the $300,000 from the IRA to purchase CST LLC. He used the CST LLC entity as the legal owner of a used car business. The IRS argued that this violated Section 4975 of the tax code, which prohibits self-dealing. The court’s decision in TC Memo 2013-245 confirmed that a self-directed IRA can fund a newly established LLC to buy and sell assets. The IRS informed its agents of this fact in a Field Service Advice (FSA) memorandum shortly after. Self-directed IRA LLCs are, therefore, recognized by the Tax Court and the IRS as legal.
Augusta Home Delivery IRAs
Augusta® Home Delivery™ Gold IRA accounts and Augusta® Home Delivery™ Silver IRAs are self-directed IRAs that enable you to invest in IRS-approved physical gold, silver and other precious metals and have them delivered to your doorstep.
While the IRS has recognized the validity of using an LLC to make investments for a self-directed IRA, the IRS has not provided clear guidance on the legality of using this structure specifically for the purpose of investing in precious metals to be delivered to your door and stored at home or in a bank safe deposit box in the name of the LLC. Multiple attorneys retained by Augusta believe the home delivery gold or silver IRA structure and the delivery and storage procedures described at augustapreciousmetals.com are legal under specific conditions. Please note, the attorney opinions were prepared solely for Augusta, and sharing them with you in no way creates an attorney-client relationship between you and any of these attorneys.
As with all speculative investments, there is a degree of risk involved. Past performance might not predict future returns. The price of precious metals fluctuates over time and investors might lose money. If your home delivery gold IRA is not set up properly, if you engage in a prohibited transaction, or if it is determined that home delivery or home or bank safe deposit box storage are not permitted by the IRS, you could lose your tax exempt status and have to pay taxes and penalties. To move ahead confidently with the opening of any Augusta home delivery IRA, it is very important that you consult with your own legal, tax and investment professionals, so you can fully understand the risks.
If you prefer to store your physical gold or silver IRA in a more secure, more customary location, you can choose a highly-secure, nongovernment, threat-averse, insured private facility. The Augusta® Gold IRA is a commonly-accepted way of storing metals inside an IRA, and its legality is not disputed. Please speak to an Augusta retirement specialist about this option.
Open an Augusta® Home Delivery™ Gold IRA Today!
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