Path 1 – IRA Checkbook
For an IRA account the path is through an IRA LLC. You must have your IRA with a custodian (say
Entrust, Pensco, Viking Bank as well as many others).
Once your IRA is funded through transfer or contributions, you direct
the custodian (this is the self-directed part) to invest your IRA funds in an
LLC. Of course, this is not your daddy’s
LLC, this is a special LLC designed especially for an IRA account. There will be special language in the LLC to
cover changes in custodians, disqualified transactions and other details
specific to the IRA investor. Remember
that your IRA account, through your trustee custodian, is the member/owner of
the LLC. You can be the manager as long
as you do not receive any compensation for doing so.
Once the LLC is set up you must go to your bank and open a business
checking account to receive the funds from your trustee custodian’s investment
in the LLC.
Path 2 – Solo 401(k)
Plan Checkbook Control
Brokerage houses set up solo 401(k) plans. But, if you want checkbook control, you will
want to contact many of us that provide a prototype plan that allow you, the
trustee and administrator of your own plan, to open a “trust” type checking
account at your bank. With this type of plan, there is no need to
set up an LLC but sometimes our clients do invest in an LLC with other
investors to pool funds for larger purchases or developments.
Path 3 – Qualifying
Employer Securities in a 401(k) Plan
When shopping for your solo 401(k), you need to ask if your
plan will allow qualifying employer securities.
This allows you to form a C Corporation and invest in its stock through
your plan. This is best used in a case
where you want to invest in a “trade or business” as opposed to “investments.” It allows you to actually be employed in the
business as well. This strategy is not
as useful for real estate investments because C Corporations do not pay lower
tax rates for long term capital gains.