Many individuals are increasingly turning to self-directed IRAs (SDIRAs) as an investment vehicle for alternative assets like real estate, precious metals and even start-up companies.
As these investments may involve tax reporting events and 1099s being issued to investors, an IRA may need its own EIN/TIN number in order to operate effectively.
Investing in Real Estate
Real estate investing can be an excellent way to diversify your portfolio, earn passive income and enjoy capital appreciation. But investors must beware the high initial costs, property management responsibilities and market risks when investing in real estate.
Real estate investments can be highly leveraged with mortgage financing, yielding significant cash flow and profits. But markets change constantly so it’s crucial to stay current on market trends and research.
No matter if you plan on purchasing residential or commercial properties or flipping houses, an EIN is required in order to identify your business for tax purposes. Apply for one online, by mail, or over the phone; just be wary of private companies offering EIN services – applying directly through the IRS website ensures faster receipt. It should take approximately four weeks. Once obtained, keep it secure and only use it for transactions related to business-related activities.
Investing in Alternative Assets
Alternative assets can help diversify your portfolio and help you meet your retirement goals more quickly, as well as serve as a buffer in case of stock market corrections.
These investments do not fit neatly into traditional equity/income/cash categories and include private equity/venture capital investments, hedge funds, managed futures contracts, real estate commodities and tangible assets like art or antiques. While they’re sometimes subject to less strict oversight by regulators than more conventional investments, such investments tend to be less liquid and have low correlation with traditional asset classes.
Before investing in alternative assets, be sure to obtain an EIN. The IRS mandates that applications for EINs identify a “responsible party,” typically someone authorized to manage and direct both its funds and assets. Applications for an EIN may be submitted either online, by mail or fax using Form SS-4.
Investing in Non-Traditional Assets
Self-directed retirement account (SDIRA) holders have seen great success investing in nontraditional assets like stocks, bonds and cash through alternative investments such as real estate, private equity/venture capital investments, hedge funds, managed futures contracts, art/antiques or derivatives contracts. These types of investments are commonly known as alternative investments.
Some assets may generate UBIT or UDFI and require SDIRA to file Form 990-T with their tax return. In order for this process to work effectively, an EIN must be provided.
An EIN is also required if an IRA establishes its own LLC for real estate investing purposes, sometimes known as an “IRA/LLC or Checkbook Control LLC”. This structure gives greater control to transactions by allowing contracts and payments directly into its bank account while having signing authority over an LLC business checking account for quicker funding of asset expenses and transactions. Using such structures may provide investors with greater flexibility for investing in non-traditional assets.
Investing in Unrelated Business Income
Many Self-Directed IRA investors can appreciate the flexibility offered by tax-advantaged accounts to invest in real estate, precious metals and small businesses – with potentially tax-exempt returns such as rental income or appreciation in value – in their SDIRA accounts. Such investments may generate rental income or appreciation without being subject to federal income tax rules; however, if your SDIRA invests in an active business as defined by IRS regulations (such as partnership/LLC investments that leverage assets with debt) that produces unrelated trade/ business Income (UBIT), then an EIN may need be applied for and paid.
An EIN helps your business become part of the public record and makes official business activities, including opening bank accounts, simpler. You can apply for one online through the IRS website; most cases you should receive your number immediately! Alternatively, Form SS-4 may be filed via mail or fax; third-party companies like Incfile also provide EIN services as part of their business formation services.