Can an IRA Go Into an LLC?
An IRA can invest in an LLC for greater flexibility when buying non-traditional investments; however, this strategy does come at an extra cost.
Understanding the tax rules surrounding IRA LLCs is vital. For example, such entities cannot conduct transactions with individuals that fall outside their scope – for instance their owner and any family members related.
Limited Liability
IRA owners looking for ways to streamline instructions and approvals with their custodian for expenses or contracts may consider setting up an LLC owned by their IRA as a checkbook control IRA structure, which could then be used to invest in real estate, private equity or any investment accessible using an LLC business checking account.
However, LLCs must be carefully formed in order to meet IRS rules regarding prohibited transactions and disqualified individuals, as well as state regulations which might require annual filing fees or one-time or ongoing payments.
Self-directed IRA investors frequently form pools with other investors to purchase larger assets like commercial real estate or equipment, known as “pooling arrangements”. Such partnerships may be structured through an IRA LLC that grants each investor management responsibility and signing authority, before owning the property on behalf of all members.
Pass-Through Income
LLCs are often valued for their ability to provide pass-through income, which means profits pass directly through to individual retirement accounts (IRAs) rather than incurring custodian fees associated with managing multiple investments held within an LLC. This can save on recordkeeping fees for multiple holdings held within it.
Self-directed IRA owners frequently utilize an LLC for real estate investments. An IRA LLC can purchase residential, commercial or raw land that ranges from single family to multi-family dwellings as well as vacation properties. Furthermore, an IRA in an LLC may purchase debt financed properties in which an initial down payment is provided while financing remains from other sources is obtained to complete the purchase.
Real estate investors and others who invest alternative assets with their retirement accounts often opt for LLC investment structures as a form of structuring investment transactions and expenses more easily. They provide flexibility of signing control over an LLC business checking account to simplify fund transfers and expenses more readily; using such an approach may even eliminate the need for property management companies to collect rent checks and expenses and reduce monthly fees significantly.
Investment Flexibility
An LLC structure can provide Self-Directed IRA (SDIRA) owners with greater investment flexibility in alternative investments, such as real estate ventures with non-IRA investors where an SDIRA co-owns shares; in such instances, an IRA/LLC provides legal separation of ownership to avoid comingling funds within partnership arrangements with those belonging to SDIRAs.
An IRA LLC can also be used to invest in private businesses not traded publicly on the stock exchange; such investments must still abide by IRS rules regarding disqualified persons and prohibited transactions.
If you’re planning on purchasing an asset that requires legal documentation such as rental property or private business, an LLC structure can make the process of purchasing much simpler by creating a separate legal entity for contracts, documents and administrative activities. Furthermore, creating an LLC business checking account more quickly allows funding of assets and expenses more easily.
Taxes
Before investing an IRA in an LLC structure, certain legal issues must be carefully evaluated. When working with professionals familiar with IRA regulations and how to incorporate safeguards into an operating agreement in order to limit or avoid prohibited transactions.
An IRA owner cannot invest in an LLC owned by themselves or disqualified persons (such as spouse, parents, children or grandchildren of the owner) nor in one with more than 50% ownership held by disqualified people to avoid engaging in transactions that could potentially lead to Unrelated Business Income Tax (UBIT).
An LLC may also be subject to taxes at the state and local levels, including property and franchise tax liabilities. You should consult a tax advisor regarding any potential liability on their end; also check with them regarding filing requirements at this level.
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