LLCs can be an ideal way for IRA owners to access non-traditional investments like real estate and private equity; however, it must abide by all IRS rules and regulations related to self-dealing.
Consult an expert when investing your IRA LLC funds legally, as this helps diversify your investments.
Limited liability
An IRA investing in an LLC can make real estate investments quickly and cost effectively, but legal counsel who understands IRA regulations can build parameters into its operating agreement that prevent prohibited transactions from happening. Furthermore, familiarizing yourself with IRS’ regulations regarding disqualified parties and prohibited transactions would be wise.
An LLC is a business entity that protects its owners against personal liability for debts or obligations of the company, making it an excellent option for self directed IRA investors who want to manage their investments more directly while diversifying their portfolios.
An LLC provides pass-through tax treatment, which means profits are taxed at an individual level rather than corporate level – providing another way to minimize taxes and maximize returns. However, an IRA/LLC owner could potentially face unrelated business income tax (UBIT). This occurs because benefits or use of assets owned by the LLC could benefit him/her directly.
Tax-free distributions
Self directed IRA LLCs provide their owners with the ability to directly manage the assets of an LLC that they own in terms of management. A SDIRA cannot invest in LLCs that already are owned by “disqualified persons”, such as spouses, children or descendants who already hold 50% or more ownership.
IRA LLCs provide the ultimate retirement fund vehicle for investors seeking to diversify their portfolio with alternative assets, including real estate, LLC/LP interests, private notes and VC/PE funds. However, this strategy requires extensive tax law knowledge.
Establishing an IRA/LLC begins by engaging a trusted provider. This involves creating articles of organization and an operating agreement to limit prohibited transactions – Entrust can assist here as well. Once your operating agreement is in place, send Entrust your investment request and open up a checking account on its behalf.
Tax-free investment opportunities
An IRA LLC allows your retirement account to invest in alternative assets such as real estate and startups, though the IRS imposes some restrictions that you should be aware of before making this type of investment. Most importantly, this IRA cannot invest in multi-member LLCs where its owner and his/her relatives own more than 50% ownership – this includes spouse, children, parents, descendants or ascendants of the account owner.
Use of an IRA LLC allows for quicker financial decisions by eliminating custodian approval delays and transaction fees; this practice is known as “checkbook control.” An IRA LLC investment strategy gives you more opportunities, flexibility, and control over your retirement funds; but be wary of violating IRS rules regarding disqualified parties and prohibited transactions – these could include alcohol beverages, collectibles, life insurance policies or S corporations among others – not to mention self-dealing rules.
Tax-free withdrawals
An IRA LLC is a legal entity into which an IRA can invest for tax-free withdrawals. This structure offers greater investment flexibility, permitting IRA holders to own and run private businesses not listed on public stock markets while providing increased privacy as it makes it harder for IRS officials to identify IRA owners in this legal structure.
Your IRA can use an LLC to buy real estate, assets or even start up its own privately-held business, provided all IRS rules and regulations are observed and self-dealing or prohibited transactions do not occur.
As an LLC manager, you cannot take out a salary for yourself, nor transact with entities owned by disqualified individuals – these transactions are known as prohibited transactions and could cause the IRS to disallow your IRA/LLC account. Therefore, it is best to work with an experienced professional when creating an IRA/LLC.
