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Your IRA may be invested in an LLC, provided that you adhere to IRS regulations regarding disqualified parties and transactions that are prohibited.
Legality
An IRA may be held in an LLC, an increasingly popular alternative investment vehicle, so long as all IRS rules and regulations pertaining to disqualified parties and prohibited transactions are observed.
Many IRA owners prefer this structure for its flexibility and control; real estate investments often use this form. By employing this structure, an IRA owner no longer needs to go back and forth with their custodian for instructions regarding contracts or expenses; instead they act as manager of their LLC with signing authority over contracts as well as access to an LLC business checking account.
An additional advantage of an IRA/LLC structure is partnering with other people or entities, including non-IRAs. This can help an IRA achieve its investment goals faster and with greater diversification. Before entering into such agreements, however, make sure you consult your tax or legal adviser first to avoid running afoul of IRS regulations.
Taxes
An LLC could be an appropriate vehicle for investing in your self-directed retirement account (SDIRA), however there are various tax implications that must be considered before proceeding with such an approach.
An LLC is considered a flow-through entity and therefore profits pass directly through to its IRA owner, while unrelated business taxable income (UBTI) tax may apply if an LLC engages in activities unrelated to investing, such as rental income.
Furthermore, it’s vitally important that businesses avoid engaging in transactions with disqualified persons as this could violate prohibited transaction rules and lead to an IRS audit, potentially costing your IRA assets and incurring costly fees. A professional can assist in helping avoid these issues. Finally, LLCs can be difficult to liquidate as opposed to traditional equity investments because their structure does not provide immediate access to cash for owners.
Management
An IRA LLC can facilitate investment transactions by eliminating the need to go through a custodian. This provides greater asset type flexibility and speed as well as savings on costs associated with recordkeeping fees charged per asset type.
But IRA owners must remain mindful of the IRS’s prohibited transaction rules; using funds in their IRA to pay themselves or anyone who qualifies as disqualified persons would violate these regulations, and guaranteeing loans to LLCs owned by their IRA is also strictly forbidden.
Additionally, they cannot invest in certain assets such as life insurance policies, collectibles, gems and jewelry that do not meet certain purity levels, certain kinds of gold and precious metal coins/bulion that do not conform to these purity requirements, alcoholic beverages etc. An IRA LLC structure makes it easier to avoid tax-sensitive events by creating more separation between IRA and non-IRA assets; additionally it helps mitigate tax impacts such as UBIT (Unrelated Business Income Tax) that arise from active business investments that generate income.
Investments
Many Self-Directed IRA investors are searching for opportunities to invest in businesses not sold on the public stock market, such as an LLC. Their limited liability status provides protection from potential business debts while keeping any owner from having to use personal funds or items as repayment.
An LLC structure can reduce transaction fees and give SDIRA holders greater checkbook control, making this form of investing especially helpful when investing in real estate or alternative investments that require multiple entities.
An IRA/LLC must be established properly. Working with legal counsel that understands state laws governing LLCs and IRA rules to develop parameters in your operating agreement that prevent prohibited transactions is key in doing this correctly. Partnering with disqualified people or entities could result in violations that should be treated carefully when entering into partnership agreements.
