Can an IRA Go Into an LLC?
Many self-directed investors opt to establish LLCs to make real estate investments; however, all investment decisions ultimately rest with each individual investor and their professional advisors.
Before investing in an LLC, IRA owners should carefully consider several aspects. These include costs associated with setting up and operating the entity as well as any IRS fees, taxes or reporting requirements that must be fulfilled. Furthermore, it’s crucial that they comprehend any prohibited transaction rules associated with creating an IRA LLC.
Taxes
An IRA LLC can be an excellent way to invest in nontraditional assets, including tax liens, real estate, precious metals and private companies. But before making this choice, it’s important to be aware of some key considerations.
If you purchase property through an LLC, rent checks should be payable to the entity rather than you as the individual owner to prevent engaging in a prohibited transaction.
If your activities generate Unrelated Business Taxable Income (UBTI), you must report it to the IRS; failing to do so could incur tax liabilities on this income.
Keep in mind that an IRA cannot be used to purchase assets owned by you or anyone affiliated with you; doing so would constitute a prohibited transaction and could incur substantial fines and penalties.
Ownership
Self-directed IRA investors often prefer an IRA/LLC structure as it gives them signing control for contracts, access to an LLC business checking account for more easily funding transactions and expenses, and registration costs vary by state – as may costs for acting as Registered Agent of your LLC – often minor additional costs associated with its registration are incurred.
LLC owners (members, or “owners”) can include individuals, trusts or corporations and there is no limit to the number of members. This provides greater flexibility for raising capital for commercial real estate deals or other investments such as bitcoin, precious metals or loans/tax liens.
An IRA/LLC may be owned by multiple IRAs, though you should consult your tax or legal advisor about any specifics related to this form of partnership in order to avoid prohibited transaction issues. These types of vehicles are commonly used for self-directed real estate investing but they can also be used to invest in cryptocurrency and other alternative assets.
Management
IRA LLCs enable investors to bypass the tedious and time-consuming approval process for expenses and contracts with their custodian, saving both time and money on property purchases, for instance. Furthermore, these entities offer investors who hold multiple assets an opportunity for savings on the fees charged per asset basis.
Legal counsel experienced with state LLC laws and IRA rules should ensure the documents for an IRA owned LLC contain appropriate provisions to prevent prohibited transactions, in particular commingling funds with your personal IRA as that may violate federal law.
This step is especially crucial if you intend to acquire real estate within an IRA LLC, since such properties require financing through bank loans that require personal guarantees and may create prohibited transaction issues.
Expenses
Associating an LLC with your SDIRA gives you the added protection offered by state laws. These can include limiting personal liability and providing privacy – however, be careful not to mix funds or violate federal rules!
An IRA owned LLC can invest in various assets, including real estate, precious metals and private equity investments. They may even consider alternative investments such as opening their own de novo bank.
Note that if your IRA already contains enough investments in an LLC to cover its purchase cost but the total investment exceeds your IRA balance, a non-recourse loan may be necessary in order to finance it.
If you’re thinking about opening an IRA LLC to diversify your retirement savings, it is advisable to speak to a qualified financial advisor first in order to better understand its advantages and risks. SmartAsset’s free tool connects you with pre-vetted advisors in your area who can answer all of your queries related to an IRA LLC and help determine if one makes sense given your individual investing goals.
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