Does My Self-Directed IRA Need an EIN?
Self-directed IRAs allow investors to explore more expansive investments than traditional retirement accounts, including real estate, private mortgages, private companies and funds, checkbook IRA LLCs, notes, precious metals and digital assets.
These alternative investments involve additional risks that require thorough due diligence to avoid unnecessary financial hardship. The IRS has stringent rules regarding prohibited transactions, investments, indirect benefits and disqualified persons that must be followed when engaging in these alternative investments.
What is an EIN?
An EIN (Employer Identification Number) is a unique nine-digit number assigned by the IRS to identify business entities. Similar to a Social Security Number for people, but specifically designated for businesses and trusts. An EIN allows entities to file tax returns, open bank accounts, apply for licenses, hire employees and perform other necessary business transactions.
All other business entities besides corporations, LLCs and partnerships with employees should obtain an EIN. This includes sole proprietorships, those using DBA names for their businesses and those electing under “check-the-box” rules to be taxed as corporations.
The IRS website provides an efficient and effortless method for requesting an EIN with its EIN Assistant tool, with results being made available as soon as the application has been validated. Other ways of applying include mailing or faxing in Form SS-4 application forms and even processing an EIN over the phone!
Why do I need an EIN?
Many individuals seeking self-directed IRA options are seeking to expand their retirement savings beyond traditional assets, specifically using more exotic investments that may offer greater returns while carrying greater risk.
An LLC or checkbook control structure is one way for self-directed IRAs to invest in assets; once formed, an IRA must obtain its own EIN number before creating its LLC.
When an IRA invests in assets which generate Unrelated Business Income Tax or Unrelated Domestic Fee Income (UBTI or UDFI), they must file Form 990-T with their state’s Department of Revenue; in order to do so they will require their own EIN number.
Notably, it is imperative that SDIRAs keep in mind they cannot buy from disqualified persons nor rent to disqualified tenants, nor pay maintenance fees on properties it owns directly themselves. To prevent conflicts of interest from arising in such instances, having a separate EIN number is vitally important.
How do I get an EIN?
An EIN (Employer Identification Number) is an eight-digit number assigned by the IRS to business entities, trusts, estates of decedents and certain government agencies. To obtain one quickly and easily through online application(opens in new tab), just complete this easy form(opens in new tab). Your EIN will arrive almost instantly upon application.
Applying for an EIN by mail or fax is another option, with the IRS typically processing your SS-4 form within four weeks.
No matter whether applying online or by paper, be sure to provide accurate and complete information as the IRS can reject an application that contains errors or missing details. Also make sure your EIN remains safe – aside from helping with tax filings, an EIN can help establish credit profiles and protect you against legal liabilities, as well as being required by certain financial institutions in order to open bank accounts.
How do I use my EIN?
EINs offer several financial advantages when used for LLCs. They help differentiate personal assets and business activities, deter identity thieves from stealing your Social Security number, and enable bank accounts under your company name to be opened. Furthermore, EINs are required by corporations with multiple owners as well as tax-exempt organizations receiving UBTI or UDFI grants.
Applying for an EIN is an easy and straightforward process that can be accomplished online, by phone, or mail. Applying online typically yields quicker results with results often available almost instantly. For any assistance or questions you might need during this process, the IRS Help Tool offers guidance through this process and their website provides several helpful articles and guides tailored specifically towards business owners.
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