Can a Self Directed IRA Be an LLC?
Some investors use an LLC within their Self-Directed IRA to invest in assets like real estate without incurring custodian review delays, which can cause significant time savings for investments that require extensive paperwork to purchase.
This method may help avoid unrelated business taxable income (UBTI) tax, which applies to retirement accounts which invest in an active business.
Taxes
Self-Directed IRA LLCs can provide investors with greater access to alternative investments; however, owners must take great care not to create prohibited transactions through this structure.
An IRA LLC with one owner is considered a pass-through entity for tax purposes; all income is distributed directly to its owner who must report it on their federal return. An IRA with multiple owners must file tax on its net profits as it would with any corporation.
Self-directed IRAs offer investors access to a diverse portfolio of assets, from residential real estate (residential, multi-family and raw land), private equity investments, unsecured promissory notes and gold coins that meet specific purity and content requirements to prohibited transactions such as investing with family members or purchasing stock of your own company, which could result in tax liabilities and possible penalties from the IRS. It is therefore crucial that your IRA structure be reviewed annually in order to remain compliant with their regulations.
Management
An IRA LLC is a popular choice among self-directed IRA investors who use their SDIRA funds to invest in alternative assets, like real estate. This structure facilitates easier transaction processes with the LLC and gives the IRA owner signing authority on an LLC business checking account to streamline transactions and expenses more easily.
An LLC also provides asset protection for an IRA owner’s personal assets. This means that if the LLC is sued or its members become liable, personal assets of an IRA owner cannot be used to cover debts owed.
However, keep in mind that an LLC structure isn’t necessary if your investment will be passive – such as private placement or REIT investments. Even so, it would still be advantageous to utilize a custodian for your SDIRA, so they can handle paperwork processing transactions more quickly and save on processing times and fees.
Ownership
Self-directed IRA LLCs allow their owners more control of their IRA investments. By investing directly without going through custodian approval and signing authority for contracts and expenses, self-directed IRA LLCs allow more privacy for the IRA owner while offering more control of investments for themselves.
Notably, it is imperative that an IRA LLC be established properly. If its members commingle funds or violate any prohibited transaction rules, then the IRS could disqualify it and result in tax and penalty liabilities for its owner.
An LLC can hold both traditional IRA assets and alternative investments such as real estate and cryptocurrency. However, collectibles, life insurance policies or S-Corporations cannot be owned by this type of structure; nor should it be owned by lineal relatives or anyone providing fee-based investment advice like accountants, attorneys and mortgage brokers.
Distributions
As part of its transition, when an IRA is converted to an LLC, distributions must be made so the new IRA LLC can purchase assets with its own funds such as real estate, promissory notes, private loans or shares in a private company.
Self-directed IRA investors seeking more control in their investments often turn to LLC/IRAs for support. By creating one themselves, these vehicles can avoid transaction fees and delays associated with custodian-controlled accounts while giving the owner full access to an LLC business checking account without risk of commingling personal funds with business funds.
Investors are advised to perform their own due diligence and understand the rules governing Self-Directed IRAs, as well as prohibited transactions. Entrust offers a quick review of LLCs within SDIRAs in order to verify if an investment may engage in prohibited activity; typically this takes place within 24 hours after receiving their documents.
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