Self-Directed IRAs allow their owners to invest in various assets – including LLCs – while adhering to IRS rules to avoid prohibited transactions.
Your IRA/LLC investments cannot mix with personal funds, nor invest in life insurance or collectibles. Furthermore, it is imperative that you comply with prohibited transaction rules and avoid dealing with disqualified individuals.
What is an LLC?
Limited Liability Companies (LLCs) are business structures designed to reduce owners’ personal liabilities while offering tax benefits. LLCs are frequently chosen as vehicles for real estate investments; however, they can be utilized with other assets too, including private companies.
Even though your self-directed IRA can own an LLC, it’s wise to consult an experienced advisor on investment options and strategies before making a final decision. Furthermore, it would be prudent to choose a custodian who enables checkbook control for maximum convenience.
Trustee and custodian services provide asset custody, process transactions, prepare IRS reports and records, assist in understanding prohibited transactions rules, assist with finding self-directed IRA providers and may charge an annual or periodic fee to serve you. Some states also require LLCs to register before engaging in intrastate business, which may increase costs and require annual registration fees as well.
How do I form an LLC?
As part of forming an LLC, the initial step should be filing articles of organization with your state. This step can usually be completed easily and affordably, and you can either draft your own or utilize a template provided by the state. Many banks require EIN numbers for businesses before opening accounts with them so this may also provide an ideal time to apply for one if you don’t already possess one.
Once your LLC is formed, it’s crucial that a well-drafted operating agreement be drawn up. This document outlines how your LLC will be managed, such as how decisions will be made and membership interests can be transferred between members. Furthermore, it should address how new members can join and how debt, taxes, profits and distributions will be managed.
As part of your IRA plan, it is important to be mindful of any prohibited transactions. For example, purchasing real estate from disqualified people or living there yourself are both prohibited transactions; additionally, paying yourself maintenance expenses on an IRA-owned property would constitute prohibited actions.
How can I invest in real estate with an LLC?
An LLC provides many advantages when it comes to real estate investing. Not only can it protect you from personal liability, but partnering with another investor on deals is also easier, while mortgage lenders are typically more willing to work with LLCs than individual investors.
Self-directed IRA LLCs can also be an effective way of cutting transaction fees. Custodians typically charge fees each time funds are dispersed, but an IRA LLC allows its owner to have checkbook control to bypass these fees.
However, it’s essential to remember that an IRA cannot invest in properties which violate Internal Revenue Code Section 408. This includes life insurance policies, collectibles such as artwork and antique rugs; precious metal bullion with insufficient purity levels; or alcohol beverages. Any time an investment violates Section 408, serious penalties could arise and it would be wise to consult a knowledgeable tax professional prior to making any investments with a Self-Directed IRA.
How can I invest in stocks with an LLC?
Investment with an LLC can be an attractive option for those seeking to diversify their retirement account portfolio with alternative investments. However, prior consultation with a financial advisor must take place in order to avoid prohibited transactions or losing tax-advantaged status of your IRA.
To get started, it is necessary to form an LLC and acquire its EIN from the IRS. Thereafter, an operating agreement that clearly outlines its operations must be drawn up as soon as possible – this should include authorising one or more owners to buy stocks on behalf of the LLC. Afterward, open a brokerage account in its name through one of many major brokerages such as TD Ameritrade which offer business accounts designed specifically for LLCs; this will give greater control and lower transaction fees than opening individual brokerage accounts on your own; however keep in mind that stock markets can change quickly!
