Does My Self-Directed IRA Need an EIN?
Self-directed IRAs offer more investment freedom; however, this freedom comes with greater responsibility.
As an investor or asset holder, it’s up to you to research, investigate and select investments and assets; report fair market values annually to the IRS; and avoid prohibited transactions. That is why it is crucial to enlist help from experienced professionals.
What is an EIN?
An EIN (Employer Identification Number) is a nine-digit number assigned by the IRS that serves a similar administrative function to Social Security Numbers for businesses.
Businesses rely on Employer Identification Numbers, or EINs, as legal forms of identification when filing federal tax returns and transacting with banks and creditors. EINs differ from SSNs or ITINs which identify individuals.
Your business structure typically requires a new EIN when its structure changes, such as adding partners to your partnership, changing its name or opening a bank account. You can apply online through the IRS’s EIN Assistant tool or download and mail/fax the paper version (Form SS-4). Online applications are generally processed immediately while mail and fax applications may take four weeks – once assigned you’ll receive notification via letter.
How do I get an EIN?
An EIN can be obtained easily and free of charge through the IRS website by using their “EIN Assistant.” It only takes minutes and is completely hassle-free.
No matter whether applying online or on paper, it is vital that accurate and complete information be submitted. Online applications tend to be processed more rapidly.
Submit an EIN application by mail or fax. Depending on whether there are any errors on your form, this could take four business days before receiving your EIN number (assuming everything was submitted correctly). Alternatively, contact the IRS either via phone or letter and ask them to assign your entity an EIN; when writing to the IRS include your legal name, EIN number, business address information – typically they’ll respond within three days.
Why do I need an EIN?
Individual retirement accounts (IRAs) are designed to provide for your retirement, and the IRS has issued extensive rules regarding contribution amounts, investment limits, tax treatment and prohibited transactions that must be followed in your IRA. Any violations could incur fines and penalties from both parties involved.
Self-directed IRAs often involve alternative investments like real estate or precious metals that have complicated ownership structures, making your responsibilities as the owner of such an account considerable. You are required to conduct due diligence on these investment opportunities as well as annually updating the fair market value of all of your assets; in addition to this responsibility lies avoiding prohibited transactions/ investments and complying with all IRS rules and regulations.
Most IRA custodians don’t require EINs for their clients and can rely on either the owner’s social security number or custodian EIN as an alternative when filing IRS forms. If you establish your IRA as an LLC and obtain its EIN separately, then instead of listing either in the Employer Identification Number box on IRS Form W-9 use that entity EIN instead.
Can I get an EIN for my self-directed IRA?
Self-directed IRAs offer account holders greater investment options and flexibility, but there are strict IRS rules that must be observed. Any violation could incur substantial tax fees and penalties; common issues include prohibited transactions/investments/indirect benefits/disqualified persons/contribution limits violations.
IRS rules dictate that it is prohibited to invest in collectibles and life insurance with an SDIRA, nor should real estate you occupy or manage be used as investments – these investments would fall under Unrelated Business Income Tax and Unrelated Domestic Fiduciary Income categories respectively.
Custodians of self-directed IRAs must file Form 5498 annually as an informational filing that tracks various data for the account. Not all custodians offer self-directed accounts; therefore, you will need to search for one who specializes in this particular type of account.
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