Does My Self-Directed IRA Need an EIN?
Self-directed IRAs allow for investments beyond stocks and bonds; such as real estate, mortgage notes, foreign currency, annuities, raw land and limited liability companies.
However, the Internal Revenue Service imposes stringent rules and guidelines regarding investments that fall within its jurisdiction, so violating them could prove costly in terms of taxes and penalties.
Tax Identification Number
An EIN (Employer Identification Number) is a nine-digit number issued by the Internal Revenue Service that identifies businesses, partnerships, corporations, trusts, estates of decedents, non-profit associations and certain individuals. LLCs owned by Individual Retirement Accounts typically require EINs when using funds in their IRA to invest in real estate, private equity funds, precious metals or notes.
Self-directed IRAs that own LLCs with one owner are considered disregarded entities for tax purposes; that means the IRS doesn’t consider it liable to pay taxes or file returns. When investing in partnerships or pooled investments like real estate syndications or crowdfunded investing, each partner will need their own Taxpayer Identification Number (TIN). When filing Schedule K-1 of Partner’s Share of Income Deductions Credits etc, etc will require filing an individual return each time.
To obtain an EIN, the custodian of an IRA completes IRS Form 5498 annually and files it. This form tracks various details about its fair market value as well as any changes within it.
Unrelated Business Income Tax (UBTI)
Self-Directed Individual Retirement Accounts (SDIRAs) open up an array of investment possibilities, from real estate and precious metals to privately held companies and more. However, SDIRAs require special care in setting them up and being administered by qualified custodians who specialize in them.
An LLC is the most common form of business entity for SDIRAs, providing several advantages over other forms of entity formation such as traditional corporations or partnerships. One major advantage is that the LLC exists as a distinct legal entity from its owners – protecting them from personal liability for its activities.
An IRA owned LLC is generally disregarded for tax purposes; however, if it incurs unrelated business taxable income (UBTI), they will need to file Form 990-T with the IRS in order to be taxed according to profit made from investments using debt financing. Using this form also helps the IRA keep track of expenses, purchases and investments made using their IRA account.
Unrelated Business Expenses (UBE)
Investing your IRA funds in an LLC where you are the sole member and manager opens up new investment options for retirement accounts, but also means being extra vigilant not to engage in prohibited transactions that violate IRS rules.
As your LLC keeps track of income and expenses, the IRS requires that you allocate them accurately on Form 990-T tax return each year. A reasonable basis must be used when allocating expenses; improper methods have resulted in incorrect filings and additional tax assessments for some organizations; improper deductions on Schedule K-1 may also arise due to mismatch. IRA LLCs need their own TIN in order to file Form 1099-MISC when reporting rental property income.
Checkbook Control
Checkbook Control is an innovative self-directed IRA investing strategy that allows you to use checks written against your retirement funds to invest. It works by creating a single-member LLC and funding it with funds from your IRA account.
Diversifying their portfolio with an LLC is an attractive choice, but investors must remain mindful of any prohibited transactions, which include dealing with disqualified persons and self-dealing. Furthermore, if their LLC generates unrelated business taxable income or unrelated domestic financial income (UBTI/UDFI), Form 990-T must be filed to obtain an EIN number.
When filling out a W-9 for a Checkbook Control IRA, the most accurate response would be using the EIN of its custodian to avoid confusion and government intervention.
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