The Good, The Bad, and The Ugly of Digital Currency - Part 5
Updated: Aug 22, 2022
Control: Self-Directed IRAs and IRA LLCs
This series of articles are intended to shine a light on all the bullshit out there about digital currency investment in your self-directed IRA.
Self-Directed IRA (SDIRA) and IRA LLCs
If you are new to the concept of digital currency being held as an investment in your IRA, let’s back up and talk about it. Digital Currency is an alternative investment that many consider as a hedge against inflation, much like precious metals, and for its diversification from the conventional market. Self-Directed IRA (SDIRA) custodians, like Preferred Trust Company, are licensed to custody the investment. Below are the steps required to invest:
■ Step 1: If you are not currently a Preferred Trust Company client, you need to open a Self-Directed IRA account. Many clients find out about the option of investing in digital currency through their relationship with a precious metals dealer that has an affiliated company that offers digital currency. Example being Priority Gold is precious metals dealer and their digital currency arm of their business is Digital One IRA. ■ Step 2: Once the application is completed you are either making a contribution to your IRA or rolling over or transferring funds from another qualified account to fund your self-directed IRA. And yes, we can help walk you through this process. It is not painful at all. ■ Step 3: If you are working with a digital currency dealer, we will work in cohesion with the digital currency dealer to purchase the digital currency on a trading platform, manage, and store your digital currency investments in a cold storage environment. ■ Step 4: Sit back and let your retirement account grow. Or be proactive and sell at the opportune time.
Described above is the hands-off or the “set it and forget it” approach to investing in digital currency. Now for all those digital currency junkies out there that want to manhandle their retirement account, let us discuss an alternative option, because we know you do not like to play nice in the sandbox. The IRA LLC is a unique Limited Liability Company (LLC) created with specific language to meet the Internal Revenue Service (IRS) and Department of Labor’s stringent requirements to ensure the integrity of the IRA. An IRA owned LLC is established to achieve “checkbook control” over the self-directed IRA account. The IRA owner is the Manager of the IRA LLC, giving them complete authority over the account as well as direct access to the qualified funds via the IRA LLC’s bank account. This essentially removes the self-directed IRA custodian as the intermediary for processing investments only.
Advantages of IRA LLCs:
■ Increased speed of investment: Complete signing authority and direct access to qualified funds means that the IRA owner can move in-and-out of investments more quickly. For example, this can be pivotal for investments in digital currency, where the price of the asset is dependent on the ability to purchase and sell at a certain time.
■ Personal asset protection: LLCs in general provide personal asset protection by keeping your retirement assets and your personal finances separate.
■ Fewer fees: Since the IRA LLC investment activities are independent of the custodian, investment transaction fees do not apply. However, the custodian is still responsible for administrative activities, such as reporting to the IRS, processing contributions and distributions, etc., which means that administrative fees will still apply.
■ Invest in both alternative and publicly traded assets: An IRA LLC gives you the flexibility to invest in alternative assets and publicly traded assets without having to rollover or transfer qualified funds between two different accounts.
Disadvantages of IRA LLCs:
■ Formation and ongoing expenses of having an LLC.
■ Increased responsibility: This autonomy places greater responsibility on the IRA owner to ensure that the IRA LLC’s activities remain compliant with IRS rules and regulations. Familiarizing yourself with the IRS prohibited investments and transactions will be pivotal to ensuring that your account does not lose its qualified tax-protected IRA status.
If you are interested in establishing an IRA LLC to achieve checkbook control over your IRA investments, Preferred Trust Company can provide this service. To learn more about the process click here. You may wish to seek professional legal and/or tax advice and guidance to ensure the IRA LLC is properly established and operated. Now let us get back to those that are not manhandling their retirement accounts.