Invested In A Single Member LLC With Your Self Directed IRA?

Self-Directed IRA LLC With Checkbook Control GUIDE
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We’re here to help you become the self directed IRA superstar you were born to be. Now that your IRA LLC is set up and ready to invest, what’s your next step? If you’re looking to invest your retirement with more control than you ever imagined, all while ensuring your account is compliant, we’ve got you covered. Keep these tips in mind for continued success when investing with your self directed IRA:

Managing Your IRA LLC

One of the biggest benefits of an IRA LLC is the added control over your account and investments— but with this added control comes some additional oversight on your part.

Income & Expenses

Since you’re investing in a single member LLC, you'll need to deposit income and pay expenses directly out of the IRA-owned LLC. All proceeds need to go back into the IRA— not to you personally (this would be a prohibited transaction). To make this easy, make sure all vendors have the correct LLC payment information from the beginning to ensure your account’s in the clear.

IRA LLC investors often keep the majority of their funds in the LLC’s bank account, but it's also a good idea to keep some cash in your IRA in case of unexpected expenses (or perhaps an upcoming required minimum distribution). If you don't have enough money in the account or your LLC, you can transfer, rollover, or contribute more funds— but if you hit your contribution limit and don't have other retirement accounts, you may find yourself in a bind. Prevent this ahead of time by keeping some liquidity in your account, so there's no need to worry if you need access to funding.

Internal Recordkeeping & Fair Market Valuations

As with any investment account, you should monitor your statements to ensure the value of your assets are being reported to the IRS as you expect. Is the value of your LLC listed lower than it should be? Are you seeing transactions in your account you don’t understand? These things are best to get sorted out sooner rather than later, and they're easier to catch if you're monitoring your account.

If you are the manager of your IRA LLC, you have a few other things to keep in mind. For example, you'll be the one responsible for updating the fair market value, which you’ll want to keep updated to make keeping your asset's value updates hassle-free (in the event you want to sell shares or take a distribution). It’s also up to you to ensure your LLC is appropriately registered and that all tax filings are completed correctly (including filing IRS Form 990-T and paying the appropriate Unrelated Business Income Tax if it applies— examined more in depth below). This is because, with an IRA LLC, you're responsible for the management of the entire LLC, so all recordkeeping duties fall to you.

Sales & Distributions

If selling assets within the LLC (with no intention of moving the funds out of the IRA), you don’t need to do anything with IRAR— you’re in charge of all the paperwork, recordkeeping, and movement of funds. Say you’ve invested in a few rental properties within your LLC and now want to sell one of them— you’d handle that whole process, making sure the property is titled in the name of the LLC and avoiding any prohibited transactions— we don’t get involved at all.

If you are trying to distribute cash from your IRA LLC, there are a few steps. First you’ll need to move those funds back to the IRA— a simple process requiring a completed IRAR Deposit Coupon on our end. Just send your funds, referencing your asset and IRAR account number, and they’ll be credited to your account. Once the funds or asset(s) are received, you’ll need to submit a completed IRAR Distribution Form indicating the dollar amount— then you’re done.


Handling UBIT and UDFI

When investing with your IRA using an IRA LLC, you may also be subject to Unrelated Business Income Tax (UBIT) or Unrelated Debt-Financed Tax (UDFI).

UBIT is a tax on income (over $1000) from a business or trade that isn’t “significantly related” to business function, charitable efforts, or educational work by the company. The IRS does this to attempt to level the playing field— since IRAs exist in a tax-advantaged environment, the thought is that this tax prevents IRA-owned businesses from having an unfair advantage over non-IRA owned businesses.

However, not all income is subject to UBIT— it depends on the source of the income. Rental income from real estate, dividends, investment income, and royalties are all exempt from UBIT— except when UDFI applies (more on that below).

For an example on when UBIT applies: Say your IRA owns a restaurant, one that is generating a monthly profit. Since this restaurant is not directly related to your IRA’s express purpose (investing for your retirement), UBIT applies to the earnings. If UBIT did not exist, your restaurant could afford to charge less than competitors (or otherwise take advantage of the tax-benefits of being an IRA-owned entity).

UDFI is a tax on any income derived from the use of “acquisition indebtedness” in your self directed IRA— meaning any income that comes from an asset purchased with debt, like when using a non-recourse loan. If UBIT applies in your situation, than a portion of income (the percentage of the asset financed by debt) would be subject to this tax.

For example, say your IRA invests $100,000 of existing funds, combined with a $100,000 non-recourse loan, to purchase a rental property that generates $10,000 income yearly. UDFI would apply to $5,000, or 50%, of the income, since 50% of the investment is financed by debt (a non-recourse loan). You may also be required to file Form 990-T with the IRS. To clarify your expenses and obligations, consult with a tax advisor before investing with a non-recourse loan.

Relevant: Self Directed IRA LLC or Checkbook Control IRA Frequently Asked Questions


Your Self Directed IRA Custodian’s Role

Though you’re doing most of the work with an IRA LLC, a self directed IRA is still required by the IRS for these types of investments when using retirement funds. The IRS has always allowed alternative investments within your retirement account, though most traditional providers didn’t typically offer them. You need to keep these investments at arm’s length, managed by a qualified third-party (and follow other rules regarding prohibited transactions).  

IRAR is also required (as a custodian regulated by the IRS) to complete regular tax reporting for the IRAs we oversee, as informed by the documentation you provide.

We do not promote investments, nor offer advice, and act as a vehicle to help you invest freely— as allowed by the IRS. We are the car, you are the driver— let us help you get there, wherever your destination may be.

Relevant: How To Invest In Real Estate With an IRA LLC



Your IRA LLC investment is one step in your roadmap to self directed success— and we’re here to guide you on your journey, whatever you may need. If you’re managing the internal recordkeeping, monitoring your account, and correctly handling UBIT and UDFI, you’re well on your way towards the retirement you’ve worked so hard for. Please let us know if there’s anything we can help you with— reach out to discuss and questions or potential strategies with one of  our representatives.


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