How to use an IRA LLC

Here you can walk through an example on how an IRA LLC can be used for a higher rate of growth of retirement funds. How to use an IRA LLC.

You have $150,000 in an IRA account and decide that you want to invest those funds into real estate that you acquire through foreclosure auctions. You create an LLC with an operating agreement listing the sole member as your IRA account. You will set up a bank account for the LLC and instruct your IRA custodian to wire the $150,000 in the LLC bank account.

With your properly organized, formed and funded IRA LLC, you can jump right in and scoop up those foreclosure sales. You spend $120,000 and acquire four homes, all of which will be purchased and titled to the LLC that is owned by your IRA. You rent each property for a few years and all of the expenses, taxes, insurance and maintenance are paid for by the company using the LLC bank account. Income from rent goes directly to the LLC. Since the LLC is owned by the IRA, the profits are tax free. As tax-free profits come in, the LLC that is inside of your IRA can buy more real estate, gold, stock or other assets to increase diversification in the retirement portfolio.

If each of your rental property nets $500 in cash flow would mean 16% increase in just cash flow. When you are ready to sell the homes, you will liquidate the holdings and your IRA can earn more tax-free cash. You sell your homes for $200,000 which is transferred directly to the LLC bank account. Your initial $150,000 has grown to $272,000.

General Rules of Thumb for IRA LLC Owners

How to avoid prohibited transactions. The IRA LLC owners, family, spouse or linear descendant should never:

1. Receive property or distributions from the IRA LLC.
2. Benefit or use any property of the IRA.
3. Pay any expenses.
4. Be paid money from the IRA.
5. Engage in any transaction.
6. Provide services, compensated or not, to the IRA LLC.

If any non arm's length investements are being looked at, you should consult with a qualified transaction advisor. There are many ways a transaction can be prohibited, most include mixing activity and expenses with IRA LLC property. If you're not sure, ask a CPA or other qualified professional. Only engage in activities that you are sure are authorized.

There is a lot for IRA owners to understand when forming the LLC. It is a special purpose investment vehicle which requires careful formation. Your operating agreement, tax status, ownership structure, operating formalities all require special IRA provisions. A trusted organization should establish this for you.