How to set up a Self-Directed IRAOpen an account. Start by opening a self-directed IRA with a depositary, deposit funds into your account. Transfer funds to your new self-directed IRA and invest in your idea. Instruct the IRA depositary to invest the funds in the asset of your choice.
A self-directed IRA is a retirement account that can be invested in any investment allowed by law. To invest in a private company, startup, or small business, the retirement account holder must have a self-directed IRA. If you have an account in a typical IRA or a 401,000 company, such as Vanguard or Ameritrade, you can only invest in investments allowed on their platform. Generally, these companies don't allow their IRA or 401k to invest in private companies or startups.
To do this, you'll first need to transfer or transfer the funds to a self-directed IRA depositary. See and download our full checklist to learn more about investing in companies with a self-directed IRA. If your IRA invests in a sole proprietorship, partnership, or LLC, taxes are not paid at the entity level and the tax liability is transferred to the owners. This is a very common form of business and private taxation, but one that will generate a UBIT tax on net profits received by a self-directed IRA.
If your LLC IRA ever goes unnoticed, it's always best to have your organization and training correct. Forming an LLC for a real estate IRA plan can save you and earn you thousands of dollars, compared to using a traditional self-directed IRA depositary. On the other hand, if your new company were a limited liability company and paid corporate taxes (that's what c-corps do), the profits of the self-directed IRA would be dividend income, a form of investment income, and UBIT would not apply. As a result, the first step in investing in a private company with retirement account funds is to transfer or transfer the funds, without tax consequences, to a self-directed depositary that allows you to invest your IRA, Roth IRA, SEP IRA, HSA or Solo 401 (k) in a private company.
But why not? How much do you think they have in their IRA or in their former employer's 401k and how attached do you think they are to those investments? Think carefully about that. IRAs and 401 (k) don't pay taxes on income or profits that are returned to the account, as long as they receive “investment income.” A self-directed IRA depositary allows for such investments, in addition to real estate, promissory notes, private placements, tax lien certificates, and more. If the “prize” is the company's overall operating income, UBIT is likely to diminish the attractiveness of that investment for an IRA. Transactions may be prohibited if the IRA or LLC is not properly established and structured.
With your properly organized, formed, and funded LLC IRA, you can get started right away and get hold of those foreclosure sales. In the last 10 years or so, the self-directed investment tool has received the greatest flexibility, that of owning and managing a limited liability company.