Can an IRA Be Held in an LLC?
Self-Directed Individual Retirement Account (SDIRA) LLC allows IRA owners to invest directly in alternative assets like real estate or startups without incurring Custodian fees, making transactions faster while decreasing custodial fees.
However, to ensure an LLC operates lawfully and avoids tax penalties or prohibited transaction rules, proper setup is critical – this includes creating a tailor-made operating agreement to control actions which could contravene laws.
Taxes
Opting to form an LLC to manage your IRA gives you more control of your investments; however, certain tax considerations need to be kept in mind.
An IRA/LLC structure can be utilized for investing in various assets, including real estate (residential or commercial), precious metals, tax liens and deeds, as well as tax deeds; however, an IRA/LLC may also invest in private equity or startup companies.
Before investing in any of these assets, it may be prudent to consult a tax advisor and review any prohibited transactions or self-dealing rules that might apply.
Example: Co-investing an asset with disqualified parties such as your spouse or employer can void your IRA status, making use of property for personal gain or receiving any direct or indirect benefit from it; also avoid receiving salary from it as this could violate IRS regulations and could void tax-deferred or tax-free status of your IRA.
Investing
An LLC-owned IRA (or “IRA/LLC”) is increasingly popular among investors who prefer a more hands-on approach to retirement planning and investing. This structure enables faster transactions with reduced custodian fees by eliminating back-and-forth instructions, authorizations and documentation requirements that have historically plagued IRA custodians.
Care should be taken when considering an IRA/LLC as the solution for your investment goals, as this structure could put you at risk of engaging in prohibited transactions and violating IRS rules.
As part of creating an IRA/LLC, it’s vital that an operating agreement meets IRS guidelines and clearly designates the owner as manager. This gives them checkbook control to invest in approved assets such as residential real estate (residential, commercial and undeveloped land), tax liens, private businesses, precious metals cryptocurrency and promissory notes among other investments.
Management
One of the most popular alternative asset investments for SDIRAs is an LLC-structured investment, commonly referred to as an IRA/LLC or “checkbook control IRA.” This structure enables SDIRA owners to invest in various alternative assets with reduced transaction fees while reaping tax advantages such as pass-through income and creating a separate legal entity.
As part of their obligations to the IRS, IRA/LLCs must abide by their regulations regarding disqualified persons and prohibited transactions. Furthermore, if an LLC generates active business income or uses debt financing (e.g. real estate rental properties), their IRA may owe Unrelated Business Taxable Income (UBTI).
LLC/IRA structures are popular among investors who desire more control of their IRA investments and want to avoid fees associated with traditional custodial accounts. Furthermore, this structure offers limited liability protection as multiple IRAs can own shares in one LLC, with ownership allocated according to dollars invested.
Distributions
Self-directed IRA investors often find it simpler and faster to manage their investments by choosing an LLC as opposed to an IRA custodian for managing investments. An LLC provides signing authority over contracts, access and signing authority over an LLC business checking account, as well as eliminating back and forth with their custodian when funding transactions or expenses.
Proper setup of an IRA/LLC is vital to complying with IRS regulations and avoiding prohibited transaction issues. An IRA owner can act as the manager of their LLC to invest in assets like real estate (residential, commercial and undeveloped land), private equity, precious metals, tax liens, promissory notes and cryptocurrency investments.
IRAs that generate income from active businesses or debt-financed properties must file Unrelated Business Taxable Income (UBTI) returns. In these instances, working with an experienced professional to navigate this complex structure is essential.
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