Discussion:Self Directed IRA LLC (Non Real Estate)
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Discussion Forum Index --> Consumer Questions --> Self Directed IRA LLC (Non Real Estate)
| 2 August 2007 | |
| I am looking at setting up a Self Directed IRA LLC to invest in a Private Equity firm. What I was thinking of doing is the following; I have a Roth IRA and Traditional IRA and I would like to invest both. I was going to setup a self directed IRA for both IRA accounts and have them invest in the LLC. Then the LLC will invest in the PE firm. I would be 100% owner of the LLC since they are both my IRA accounts.
The reason I was considering this is because the investment isn't a lump sum investment instead it is based on capital calls. So if I have 50k in my IRA and commit to 50k in the PE I might not pay the 50k for a few years. I figured if I have the LLC i can invest the money in some low risk stock or possibly a savings account and write checks as I need, which would be less work then dealing with a custodian for each capital call. Please let me know what you think. | |
Doug Phillips (talk|edits) said: | 2 August 2007 |
| The problem you will probably run into is that no one will be willing to act as fiduciary/administrator of such an IRA.
There are some brokerages that will act as such on investments in closely held stock companies, but your situation may be even further out of the realm than they are comfortable with. Good luck. | |
| 2 August 2007 | |
| I did a self-directed IRA with Private Notes. It took significant effort to find a IRA Administrator who would hold this type of instrument. With research, this can be done. You should investigate the IRA Administrator carefully. IRA administrators of this type are not covered by Governmental insurance (similar to a 1031 accommodator). Hence, you run greater risk than assets may disappear.
Wouldn't be easier to by stock of the few Private Equity Firm going public. | |
| 2 August 2007 | |
| When you say no one would want to act as a administrator, are you referring to the custodian? If so why would they be more reluctant then a LLC setup to buy real estate?
As for why not invest in a public PE firm, the reason I am investing in this firm is I just recently left public accounting to work at the PE firm on the accounting side and have an opportunity to invest in the company. | |
| 2 August 2007 | |
| Yes custodian is correct. Most pre-tax investments in real estate are not held in LLCs per my experience. | |
| 2 August 2007 | |
| Not much more to add without doing extensive research. Good luck with your inquiry. | |
Mtmckeecpa (talk|edits) said: | 3 August 2007 |
| Ryan,
You may want to check out the following third party administrators to help you These folks may work with you on your checkbook control IRA...all are well known TPAs that handle nontraditional IRA investments...i.e., private placements, real estate, notes, etc.... | |
| 3 August 2007 | |
| Mtmckeepca,
I looked at those sites along with a few other, and I know I an get a custodian to invest in a LLC, I was just more concerned about any IRA issues with investing in the LLC for purposes of investing in private equity. I have done a lot of reading about people doing it for real estate but never for anything else. | |
Death&Taxes (talk|edits) said: | 3 August 2007 |
| I know I had one client years ago whose IRA invested in a LP that bought and owned a Major League Baseball team, but I can give little help about how he 'got to first base.' I do know that when the team was sold, his IRA profited handsomely, but all filings were taken care of by someone else. He never had any complaints. | |
Mtmckeecpa (talk|edits) said: | 3 August 2007 |
| Ryan,
I invested part my IRA in a private placement (common stock) in Orlando. So far, so good. | |
| 3 August 2007 | |
| It seems like a good alternative instead of paying a custodian any time you want to make additional payments for capital calls or something to that effect. As long as the LLC doesn't earn ordinary income to trigger UBIT rules I don't think the IRA would have any filings, but the LLC would have to file a return. | |
| 3 August 2007 | |
| Mtmckeepa,
I know I can invest in the PE firm through a custodia easily, my issue is I wanted to invest in a LLC to invest in the PE firm because then I can do something with the cash that hasn't been called instead of having it sit for possibly years at the custodian. | |
Mtmckeecpa (talk|edits) said: | 3 August 2007 |
| Ryan,
I think understand...dropping the IRA down to a LLC "checkbook" so you truly have control. I believe most of the TPAs invest your idle cash in a MM fund...BTW, I believe that is where they earn the bucks on the spread, not the fees they charge. | |
| 3 August 2007 | |
| Mtmckeecpa,
I will have to look into what they do with the idle cash and the percents they give. Thanks for your help | |
| 20 October 2007 | |
| First question I would ask is are you an accredited investor and why would a PE firm take a deposit in such a small increment of $50k? Seems like two red flags to me.
Second question, why mess around with creating your own llc structure? The majority of Private equity (and hedge fund) firms are formally domiciled in outside of the U.S.(i.e. Cayman Islands). They are then most frequently structured as llc, c-corps or limited partnerships. The structure and location are important to obeying the current IRS laws regarding Unrelated Business Tax Income restrictions and a specific component of it called Unrelated debt-financed income (UDFI). By structuring correctly outside the U.S., the door opens for 501c(3)'s (foundations, endowments, etc) and IRA's to invest without violation of IRS rules. This is major component in fueling the growth in PE investments. Most taxable investors don't fully understand this, commit to the structures and then get hammered on tax bill reducing their after tax, after fee return to a point where it isn't all that different from S&P 500 over long periods of time. The Senate & Houase are reviewing the allowance of the UBIT structure and may change it at any point in the future. The probability of some change out of Washington seems to be growing. A self directed IRA as the owner of the PE firm seems like the most appropriate structure which should allow control over the cash (the draw period on your $50k committment can take as long as 7 years depending on the type of PE fund and the opportunities they find/commit to). Double check with your CPA...getting this wrong could cause the wrath of the IRS which at a minimum could include UBTI taxes. If your involved or benefiting from the PE (or your proposed llc structure) directly it could even void the entire value of your IRA forcing it into ordinary income for the year plus penalties. If the PE firm your investing with isn't structured overseas in a zero corporate tax country, I would ask the question do they really know what they are doing? But then again, I'm asking the question do you really know what your doing? | |
