Does My Self Directed IRA Need an EIN?
SDIRAs allow investors greater investment control by including nontraditional assets like real estate, private equity, precious metals and debt-based financial instruments (like mortgage notes) within their IRA investments. However, these assets must follow special guidelines set forth by the IRS.
Your responsibility as an investor lies in scrutinizing opportunities and avoiding transactions that could void tax benefits, such as renting to unqualified people or compensating yourself for maintenance work at your IRA properties.
The Custodian’s EIN
Fraudsters still attempt to sell fraudulent investments through self-directed IRA custodians; therefore obtaining an individual IRA Account Holder EIN may help protect them from being misidentified by third parties. For assistance creating one with the IRS contact your CPA, Financial Advisor, Attorney and/or Custodian (Private Entities Department is an ideal place to start).
An Employer Identification Number (EIN) can also come in handy if you are dealing with alternative assets that have limited disclosure requirements, such as rental properties, secured promissory notes or tax liens.
Many SDIRA investors can be intimidated by investing in SDIRAs due to lack of information and liquidity issues; moreover, it may be more challenging to liquidate than stocks and mutual funds. Because of this, it is vitally important that you work with a custodian that supports these transactions and can facilitate these kinds of investments.
The IRA Owner’s EIN
Some states and local jurisdictions mandate an EIN for entities filing taxes; this may include real estate transactions, LLCs and taxable partnerships.
Many investors choosing an SDIRA opt for an IRA/LLC structure known as “checkbook-controlled IRA.” This is generally done for tax reasons as the name of the LLC appears on title deeds and where investment bank accounts receive income. A separate EIN/tax ID may be needed from third parties such as property management companies or lenders to register an IRA/LLC with them.
When applying for an EIN with the IRS, applicants are required to provide the name and Social Security number or ITIN of its responsible party – meaning anyone who manages or directs the funds and assets belonging to their entity – along with signing of their application. EIN applications can be filed online, by phone, fax, or mail.
The IRA Custodian’s EIN
IRA custodians are typically non-bank trust companies chartered by individual states. They’re subject to both state and federal laws that ensure they meet IRS regulations.
Scammers frequently misrepresent the role of an IRA custodian by misrepresenting that institution as being one that oversees investments and protects investors against losses. While such institutions play a vital role in traditional investment markets, it remains your responsibility to do your own due diligence to find legitimate investment opportunities in your self-directed IRA.
Custodians for individual retirement accounts (IRAs) should act only to passively hold and administer assets held within your account, with no involvement in soliciting investments or making recommendations; anyone claiming otherwise should be avoided at all costs. For additional protection, seek advice from trusted advisers before investing, as SDIRAs have unique tax rules which must be observed; operating businesses and debt-financed real estate are prime examples that generate taxable income that must be reported on Form 990-T annually.
The IRA Owner’s SSN
Self-directed Individual Retirement Account (SDIRA) LLCs allow account holders to purchase alternative assets like real estate while also minimizing transaction fees through giving checkbook control of the SDIRA LLC. When creating one, your IRA custodian will require you to provide their name, EIN number and SSN of both you and the LLC.
For tax purposes, LLCs with one owner are treated like sole proprietorships for tax reporting. An IRA owner then reports income earned through this LLC on their federal tax return. However, if an LLC they owned generated unrelated business taxable income (UBTI) or unrelated debt-financed income (UDFI), then Form 990-T would need to be filed instead.
Your IRA custodian will report the value of your investments each year on Form 5498 to the Internal Revenue Service, so they must know both your LLC EIN and individual IRA account holder EIN in order to accurately report this information to them.
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