Setting Up a Self-Directed IRA with an IRA Custodian

The question that most people are interested in asking, but they rarely ask.  What steps are typically followed with the IRA custodian when establishing your self-directed IRA LLC?  Why?

Probably because they place significant trust in the self-directed company assisting with the establishment of the self-directed IRA LLC.  But, since a portion of that process involves the IRA account owner’s involvement, you might as well have a good idea of what the basic steps are that will include your involvement.

The self-directed company you retain to assist you with the establishment and funding of your IRA LLC will, generally speaking, execute everything that needs to be done with this process.  As I like to mention, the company assisting you should do everything they can legally, ethically and morally do in assisting you with your plan set-up.  But, of course, there are certain functions during the process that a company cannot be doing for you….you have to be involved with some of these steps.  These include signing the application, calling on your behalf to a financial services company to make requests on your behalf…when you are the IRA account owner!  But, as you can see, these steps are common sense and you would assume as much.

Steps for Establishing Your Self-Directed IRA

Remember that the IRA LLC will give you “checkbook control” of your IRA assets with a single-member IRA that is 100% owned by the IRA plan.  You, or your designee, act in the role of manager of the LLC and make investment choices on behalf of the plan.   This IRA account will be established through an IRS-approved, FDIC-insured, IRA Custodian.

While  we work with several custodians, they all have very similar forms that a client must complete in the application process to establish the account and fund their new IRA plan and IRA LLC.  Let’s review the basic steps you will need to execute to establish your self-directed IRA custodian account.

  • IRA Account Application — While the self-directed custodian may populate your application to assist you, you will confirm the information populated and sign and date the application.  This application will break down what type of IRA account you are establishing, and request general information such as the IRA account owner’s address, personal information, inclusive of social security number, driver’s license number, date of birth, etc.  All of this information is required by the custodian to open your account.
  • IRA Transfer Form — Many people may be transferring funds from another IRA to fund the new self-directed IRA.  It is highly recommended that you have the self-directed IRA custodian perform this role for you.  There is certainly no fee associated with the transfer and by the custodians executing the transfer between the two institutions, you do not need to worry that it will be executed correctly.  It will be transferred from one custodial account to the new self-directed IRA as a non-taxable transfer of assets.  If your funds are coming from another type of qualified plan (e.g., 401(k)), this will  be a rollover and you will need to make the request for the rollover funds.
  • IRA LLC Agreement — This is an agreement between the IRA and the LLC.  In simple terms, general IRS regulations are outlined and you, as manager of the IRA LLC, confirm your understanding that the IRA LLC must comply with all IRS rules.   This also confirms that you IRA is purchasing 100% of the assets of the new IRA LLC, and that you do not hold the IRA custodian responsible for the investments that you make on behalf of the IRA LLC.
  • Deposit Form — This is a form that is used if you are creating your plan with a new contribution to your IRA or to make a rollover deposit/contribution.  This form is also used for making on-going, annual contributions to your IRA.
  • Investment Authorization or Direction — Once funds are accepted by the IRA in transfer or rollover, you, as the IRA LLC manager, will authorize the IRA custodian to forward funding to the IRA LLC.   This type of form is necessary to authorize the custodian to transfer funds out of the IRA to the IRA LLC.
  • Other Forms — As mentioned, every custodian is slightly different in what forms they require to establish your IRA.  These forms, however, are typical forms that custodians use in funding and transferring funds to your IRA LLC.

Also, please keep in mind that the IRA custodian has the annual requirement to report the value of your IRA to the IRS each  year.  This is typically done for the IRA LLC through a Fair Market Valuation Form (FMV) form. The IRA custodian will send this form to the IRA LLC manager each year.  As the manager, you will report the FMV to the custodian so that they can execute their responsibility.  The requirements associated with this reporting will be changing effective with the 2015 year….so, be prepared for some additional responsibilities that you will have as the IRA LLC manager.  It is important that you take this responsibility seriously and make a concerted effort to value the assets of the IRA LLC accurately.