Can an IRA Be Held in an LLC?
An Individual Retirement Account, or IRA, is an increasingly popular retirement savings vehicle, providing tax-free withdrawals starting at age 59 1/2 without penalties.
Self-directed Individual Retirement Account (SDIRA) owners are increasingly investing in alternative assets through self-directed IRAs, including LLC-structured entities that invest in real estate ventures.
Utilizing an LLC as a vehicle to invest in these assets can reduce both time and hassle when reviewing deals, but proper compliance with IRS rules must be maintained to avoid prohibited transactions.
IRA Custodians
Custodians often are unable to offer all of the advantages of an LLC due to requiring original paperwork for every transaction and having a lengthy review process, creating delays that prevent investors from participating as quickly in investments as they would like.
Custodians must abide by certain IRS rules regarding any transactions with disqualified individuals or entities, such as not commingling funds and paying themselves salaries from their LLC.
An IRA LLC allows an IRA to invest in non-traditional assets without being subject to custodian control, which can be particularly useful when investing in complex investments like real estate or rental properties. Furthermore, this structure gives greater control of investments, though this involves additional complexity due to IRS regulations.
Pass-Through Income
LLCs are an ideal vehicle for Self-Directed Individual Retirement Account (SDIRA) holders to invest in alternative assets, from hedge funds and private REITs to crowdfunding campaigns. By investing through an LLC, SDIRA holders gain the advantage of pass-through income which reduces transaction fees while making transactions appear less complex to settlement companies that might be unfamiliar with IRAs.
This structure protects IRA owners from prohibited transactions, an essential protection since most custodians restrict an IRA’s investment options to traditional investments like stocks, bonds, mutual funds and CDs.
To establish an IRA/LLC, first locate a provider offering this service and apply for an EIN (Employer Identification Number). When complete, your registered agent should be physically available for legal papers to be collected at their offices. When complete, send your new LLC and business checking account directly to SDIRA custodian for funding.
Limited Liability
An LLC within your Self-Directed IRA can protect you from personal liability. However, setting up such an IRA-owned LLC for real estate investments requires careful planning in order to adhere to IRS regulations and remain compliant.
Working with an experienced professional who can navigate both the process of forming an LLC as well as investing in real estate through an IRA-owned LLC is vital in order to correctly structure it and draft an operating agreement that complies with federal and state laws regulating these entities.
Notably, an IRA-owned LLC must not engage in prohibited transactions with disqualified individuals, so it is crucial that you work with a qualified professional when creating your IRA LLC and reviewing transactions made by it to ensure they do not breach federal or state rules and regulations. Furthermore, you must register your LLC with your state as well as pay any related fees associated with registration.
Taxes
SEP IRAs make saving for retirement easy for small business owners and self-employed individuals, offering you up to $69,000 of annual pretax contributions.
An LLC allows you to invest your IRA funds in real estate, private companies and other assets; however, engaging in prohibited transactions could result in your IRA being disqualified by the IRS and you incurring taxes and penalties as a result.
IRA/LLCs are increasingly popular among investors who invest in real estate. When an IRA owns property under an LLC name, its own checking account makes transactions and expenses simpler to fund; moreover, an IRA/LLC provides privacy and anonymity to its owner.
As it is prohibited by the prohibited transaction rules, it is vital that you and the other IRA owners don’t combine funds. Doing so would violate this provision of your IRA Agreement and require less than 50% ownership or control in an LLC entity.
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