Can an IRA Be Held in an LLC?
An LLC is an attractive alternative investment vehicle for Self-Directed IRA owners, offering several tax advantages as well.
Furthermore, this technology enables IRA investors to invest in real estate more quickly and cost effectively as there is no longer any custodian review process involved.
An IRA LLC allows investors to invest in various assets, such as residential and commercial real estate, raw land suitable for single-family dwellings to multi-unit properties, contracts for sale and lease options and even commodities futures contracts.
How to Set Up an LLC
Step one of forming an LLC for use with your IRA is filing articles of organization with your state. In New York, filing your articles can be done at either the Secretary of State’s office or through an agent company licensed to act as one for a fee. Your Articles of Organization should designate a county in your state along with an address where legal papers can be served to the company.
Your IRA LLC should obtain an Employer Identification Number (EIN) and open a business bank account in order to maintain separate personal and company finances while simultaneously building business credit. Some banks may request certain details such as your company name, date of formation and owner names and addresses in order to open one.
An LLC within your Self-Directed IRA can often be the best way to purchase real estate and alternative investments such as tax liens, private equity and precious metals. But investors must remember that establishing an LLC doesn’t shield them from prohibited transactions.
Legalities
An LLC (Limited Liability Company) is a legal entity that offers similar protections as corporations for its owners. An LLC may be formed with one or more members, making it ideal for setting up self directed IRAs. Midland Forms’ subsidiary can assist in setting up an LLC.
IRA LLCs can be great options for investments that require active management, like real estate. Furthermore, creating one allows you to avoid multiple custodian fees; all assets purchased can then be placed under one entity so only one fee applies per asset purchased.
Real estate investors often utilize an IRA/LLC structure as it makes signing contracts and accessing LLC business checking accounts simpler. However, it is essential to remember that an IRA LLC must abide by IRS rules concerning disqualified parties and prohibited transactions; failure to do so could incur penalties and lead to the loss of its tax-advantaged status.
Taxes
In general, IRAs investing in alternative investments must go through a custodian to be managed properly and every time an action needs to be taken the IRA owner must submit written requests with supporting documentation to this third-party custodian – this can become cumbersome and time consuming.
An IRA LLC allows an IRA to act directly, using checkbook control. As part of upgrading to this form of investment management, a bank checking account will be opened where all investments will be deposited.
Operating agreements that adhere to tax code provisions regarding IRA-owned LLCs must also take account of potential taxable events that could occur, such as unrelated business income tax (UBIT). Furthermore, this IRA LLC requires its own EIN number and file Form 990-T annually; depending on what investment strategy it uses it may need its own specific EIN and file its own Form 990-T annually as well.
Investments
IRA LLCs can be ideal investments for alternative investments that require hands-on participation, like real estate or private equity investments. Their structure facilitates easier transaction processes and grants the IRA owner signing authority on an LLC business bank account to reduce custodian fees. But care must be taken when using this structure to avoid prohibited transactions.
An IRA LLC can also be helpful for investors who wish to avoid paying property management fees, particularly those investing in rental properties or flipping houses. However, any IRA purchasing real estate should always work alongside professional investment advisors in order to comply with regulations.
IRAs provide tax advantages for retirement savings, and you can contribute annually up to the IRS-determined maximum limit. Traditional IRAs allow tax-deferred contributions while taxes are deferred until retirement; and Roth IRAs permit after-tax investments which allow withdrawals tax-free.
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