Can I Invest My IRA in an LLC?
An IRA LLC allows self-directed retirement accounts to invest in alternative investments like real estate and promissory notes without incurring the custodian’s review process, which often delays purchases and settlement of investment property.
Learn why the IRA/LLC is the ideal vehicle for direct investments like real estate. Understand its benefits, structures and concerns before beginning this investment journey.
An LLC is an effective business and investment vehicle, with over 22 million LLCs currently active in the US. Self-Directed IRA investors can utilize an LLC as a vehicle for investing in assets like real estate, private company stock or precious metals.
IRA LLCs are a popular option among investors who prefer checkbook control. By creating an LLC wholly owned by your IRA, investments can be directly funded from its bank account and utilized directly for investing.
This investment strategy gives IRA owners more options and diversifies their retirement portfolios by investing in what they know best, an IRA LLC can hold single-family homes to multi-family properties, building lots, contracts for sale and lease options – however IRA owners must ensure that any transactions with disqualified parties such as close family members or business partners do not violate federal or state restrictions or engage in prohibited transactions with prohibited individuals (ie: close relatives or business partners). Finally, like any entity, an IRA LLC must file taxes at its own entity level as any other legal entity would.
Although it is possible to invest your IRA directly in alternative investments such as real estate without using an LLC, the process can be much more cumbersome and often results in delays meeting investment deadlines. Your Custodian must review all paperwork prior to closing on closing deals which often creates delays when meeting investment commitments.
An LLC provides its owner with “checkbook control”, so they can make IRS-approved investments directly into a business checking account. Furthermore, personal funds will never mix with an IRA’s funds; and its owner serves as manager of the LLC.
For an LLC with multiple owners, taxation will follow partnership principles; earnings will be taxed at both levels while members receive their share of losses pro rata. It is therefore vital that its Operating Agreement include provisions for different ownership interests (also referred to as Units), such as Voting Nonvoting Preferred Interests. Furthermore, such an arrangement could provide for non-recourse debt loans without recourse clauses.
If you are seeking to invest with multiple investors, an LLC is an ideal vehicle. Here, the operating agreement must clearly outline how profits and expenses are distributed among member-investors; usually members choose between being member or manager-managed LLCs for tax reasons – member managed LLCs allow earnings to be taxed once, while deductable losses can be deducted on a pro rata basis by each member-owner.
Self-Directed IRA owners seeking alternative assets such as rental real estate are increasingly turning to LLCs with “checkbook control” as an attractive vehicle for investing. Under such structures, an IRA owner will have signing authority and access to its business checking account, making funding investments faster and cost effective. It should still be noted that any transaction should be reviewed for compliance by an administrator to ensure it adheres to IRS regulations.
An LLC, like any company, can take in funds and use them to turn a profit – in this instance the profits can be distributed among the Members proportionately according to their Membership Interest.
Self-Directed IRA owners frequently opt to invest in an LLC rather than directly into portfolio companies, as this approach offers faster and simpler investment processes with greater privacy as investments are made under an LLC name rather than individual names.
LLCs typically qualify as “pass-through” entities for federal income tax purposes unless they opt to be treated like corporations, meaning earnings don’t require entity-level taxation and losses pass directly through to individual tax returns of its owners. This is an attractive feature of LLCs for freelancers and small business owners as it helps facilitate simplified tax issues like unrelated business income tax and unrelated debt finance taxation.
Categorised in: Blog