Self-directed IRAs may invest in LLCs as long as the entity complies with IRS rules regarding disqualified persons and prohibited transactions.
Many IRA owners use an IRA/LLC structure when investing in real estate or other investments, as this facilitates an easier transaction process and grants signing authority on contracts for expenses with an LLC business checking account.
What is an IRA?
Individual Retirement Accounts (IRAs) are tax-advantaged accounts in which contributions may be tax deductible and earnings deferred until withdrawn at retirement age. Traditional, Roth and SEP IRAs can all provide investors with tax benefits; but an increasing trend among investors is to use self-directed IRAs that enable full diversification across alternative investments like real estate holdings, LLC/LP interests and private company shares and notes.
One of the most prevalent forms of self-directed IRA is an LLC, either single member or multi member entity, that provides “checkbook control” over investment activities within an IRA. When used properly it can provide invaluable oversight over investment activities; however it must be set up correctly to avoid compensation for services from disqualified people1. Otherwise a prohibited transaction would occur that would disqualify an IRA’s tax advantaged status and leave its owner exposed to tax penalties.
How can an IRA be held in an LLC?
An IRA can be held within an LLC that invests in alternative assets like real estate investments. This structure is popular among those seeking to self-direct their retirement funds; an investor invests capital into a newly formed LLC which then acquires their target investment asset such as residential or commercial real estate, LLC/LP interests, notes, private company stock or VC/PE funds.
Utilizing an LLC can offer account holders an easier investment process as purchases, expenses and contracts can be handled directly through the entity rather than needing approval from their custodian. However, additional responsibilities must still be fulfilled on behalf of account holders so it may be prudent to have legal or financial advisor assistance for managing these arrangements – particularly regarding federally required prohibited transaction rules2.
Can an IRA be invested in an LLC?
Self-directed IRAs offer the potential for diversification into alternative investments such as tax liens, real estate, private businesses and precious metals. One method of investing is through special purpose LLCs that offer “checkbook control”.
An LLC may be established solely to invest in non-traditional investment assets; however, certain transactions and situations are prohibited by the IRS; these are known as prohibited transactions and include specific individuals whom your IRA cannot conduct business with known as disqualified persons.
If an IRA invests in an LLC, the resulting entity must be manager-managed rather than member managed (with its owner acting as member). Furthermore, an IRA/LLC should include articles of organization and an operating agreement tailored to restrict actions which violate IRS rules applicable to IRAs. This process can be complex, so qualified professionals are needed for assistance; UpCounsel offers attorneys from top law schools who possess on average 14 years of legal experience – perfect for your case!
How can an IRA be invested in real estate?
Many IRA owners choose to have their IRA invest in an LLC that holds real estate investments rather than directly purchasing property, which allows for greater control and diversification in their investment portfolio. When setting up and managing an LLC for your IRA account there are some considerations you should keep in mind.
An LLC used for self-directed IRA investments must comply with IRS rules regarding these accounts, such as prohibited transaction rules and tax situations such as UBITI. Proper accounting and recordkeeping should also be practiced by such an LLC.
As well, an IRA cannot invest in an LLC where both its owner and other people/entities (known as disqualified persons ) own more than 50%. Furthermore, companies in which both are involved as officers/directors/shareholders constitute potential conflicts of interests for investment purposes.