Can an IRA Be Held in an LLC?
Real estate purchases require going through an IRA custodian who requires paperwork and communication with investors in order to complete the investment, often taking several days and sometimes weeks before completion.
Some self-directed IRA investors use LLCs to manage their IRA investments more quickly; however, this strategy may create serious complications.
Taxes
Although an LLC may seem like an easy way to avoid double taxation, it’s essential to keep in mind that there’s no guarantee the IRS will treat an LLC the same as other forms of business entities.
LLCs can elect to be taxed as pass-through entities with the IRS, meaning profits don’t get taxed at a corporate level but rather passed along directly to owners who report them on their personal income taxes.
Be mindful that traditional IRAs do not become subject to tax until an investor takes a distribution (withdrawal). Withdrawals made before age 59 1/2 may incur an additional 10% federal tax penalty on top of ordinary income taxes.
Investing
Self-directed IRA investors frequently employ an LLC as an alternative investment vehicle in real estate and other assets, providing more checkbook control while cutting transaction fees. If configured incorrectly however, such structures could become compliance black holes that result in compliance issues for all involved.
IRA LLCs can invest in almost any asset permitted by the IRS, with the exception of collectibles and life insurance policies. Common types of investment alternatives for an IRA LLC include real estate, promissory notes and private equity. Furthermore, partners or people can partner together with them to raise capital through this investment vehicle. However, to avoid violating any prohibited transaction rules it is wise to consult both your tax advisor and legal advisor as early as possible in this process.
Your IRA cannot invest in an LLC owned by you or other disqualified persons (this includes spouse, descendents and ascendants) already owning 50% or more. Furthermore, it is crucial that personal funds do not get mixed in with your IRA investments.
Checkbook control
Checkbook control IRA accounts have many advantages for their owners, such as providing complete signing authority over funds without needing custodian approval for alternative investments or property purchases. Account holders must keep accurate records and comply with IRS rules on prohibited transactions.
Real estate, promissory notes, tax liens and private company shares all present lucrative investment opportunities for an IRA investor. But remembering to set up the LLC under your IRA name with its own EIN number can make all the difference; and failing this could mean disqualifying it as tax-advantaged status is compromised.
Though self-directed IRAs may seem appealing, setting one up can be complex and managing it is best left to professionals to ensure compliance and to prevent potential prohibited transactions.
Legal issues
An LLC allows IRA investors to invest in various real estate types including residential, commercial and raw land across single-family, multi-family and building lot properties, along with contracts for sale or lease options. By using an LLC account owner can invest directly without going through their custodian for investment instructions, approval of expenses or contracts approval and signing authority approval; also profits of an LLC flow directly back into their IRA without tax being assessed as Unrelated Business Taxable Income (UBTI).
However, investing in an LLC structure requires some restrictions in order to prevent an illegal transaction between an IRA account owner and any disqualified person (this includes spouse, children, parents and any entity with 10%+ ownership or any close relation). Therefore, hiring professional help for setting up and documenting your LLC structure is the best way to ensure compliance.
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