Can an IRA Go Into an LLC?
Self-directed IRA investors frequently utilize LLCs in conjunction with their IRA to purchase real estate and other investments, but the IRS has imposed certain rules regarding prohibited transactions and disqualified persons that must be adhered to.
An IRA LLC provides investors with speed, cost and control advantages when investing in real estate deals, as it eliminates paying a custodian’s per-asset fee.
An IRA invested in an LLC is taxed like any other entity and may be subject to UBIT, UDFI and other taxes; however, an LLC with only one member does not need to file tax returns as it is considered disregarded entity by the IRS for filing purposes. If more than one member are present then their LLC becomes subject to partnership taxes and must submit IRS Form 1065 annually for filing purposes.
An IRA can invest directly in an LLC that it controls, but account owners must take care to avoid conducting prohibited transactions between their IRA and the entity in which it invests – this could lead to disqualification and penalties from IRS. Working with a self-directed IRA custodian who understands and permits investing in LLCs, real estate and other alternative assets will help IRA owners avoid prohibited transactions while complying with IRS rules for investing within an IRA.
IRA owners who utilize an LLC as part of their investment strategy often utilize it to avoid going through their custodian for every investment transaction, which saves both time and money in terms of back-and-forth transactions, while also decreasing fees charged by their custodian.
This structure is ideal for hands-on investments like real estate. An IRA owns an LLC which then purchases investment properties. These properties may then be held as rental property or rehabbed and sold, saving on extra management company costs. Using an LLC may also allow investors to avoid additional expenses associated with management companies.
Some investors have employed the LLC structure for investments other than businesses, including privately held firms; however, this can be risky and should always involve tax or legal advice. Some transactions that should never occur include partnering with disqualified persons, buying life insurance policies from disqualified providers, collectibles (such as antiques and stamps), non-highly refined gold bullion coins or bullion and alcohol beverages.
An LLC allows clients to take advantage of investment opportunities they wouldn’t otherwise be exposed to, such as real estate, tax liens, private businesses, equipment leasing contracts and precious metals. Yet their IRA still follows Self-Directed IRA rules for prohibited transactions and other relevant considerations.
One of the key advantages of investing in an LLC is its ability to pool funds from multiple investors into a single entity under legal and contractual guidelines, providing more funds than are currently available within individual accounts for real estate purchases. This can especially prove helpful for IRA account holders seeking to purchase properties which require larger sums of capital than are available within their accounts.
IRA investments must go directly to the LLC rather than to individual investors (this would constitute an unlawful transaction), while all expenses must be made payable to the LLC and then forwarded directly to STC so they may be credited against your account.
An IRA LLC is a popular option for self-directed IRA investors looking to purchase nontraditional investments such as real estate. It provides several advantages, including being able to quickly react to opportunities such as tax lien auctions or foreclosure auctions, while eliminating third party IRA custodian fees associated with each transaction.
LLC entities provide limited liability protection to IRA owners, which is especially helpful when entering into contracts or signing checks that must be fulfilled as part of certain investments. You must still abide by your IRA’s rules regarding prohibited transactions and disqualified parties.
One advantage of LLC structure is making financing non-traditional investments such as rental properties easier. When purchased through an IRA LLC, checks made out to an entity other than an IRA can make for easier approval by banks and lending institutions.
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