Everything You Need To Know About LLC Checkbook Control and IRAs

Frequently asked questions.

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Checkbook Control and IRA LLCs

Internal Revenue Code allows investors to hold a variety of assets through a Limited Liability Company (LLC) through their Self-Directed  Individual Retirement Account (SDIRA) — with the exception of life insurance and collectibles. Because an LLC is not a prohibited asset, it is an optimal investment strategy for your self-directed IRA. Browse the frequently asked questions and answers to everything you need to know about the Checkbook LLC or Checkbook  control and IRAs.

Frequently Asked Questions

What is an IRA LLC or Checkbook IRA? 

An IRA LLC or Checkbook IRA  it is a legal entity that can purchase assets outright, allowing you the freedom to self-direct your retirement funds. A checkbook is set up and linked to a checking account that is set up in the name of your LLC under its own tax ID number. This is a popular strategy among real estate investors, who often need quick access to cash for maintenance and repairs, or in the event of making a quick investment, like at an auction.

Assets and cash for the LLC or the actual self-directed IRA account are all held in the same location under your IRA (i.e., both the LLC and checking account). The title of the checking account must be in the name of the LLC owned by the IRA. Any distributions to the IRA holder must be sent to the IRA custodian for proper reporting to the IRS.

Is having an LLC in my IRA permitted? 

Yes, it’s legal. The Internal Revenue Code doesn’t list the types of assets that you can invest in. It only states what you cannot invest in. The only two prohibited assets are life insurance and collectibles. Because an LLC is not a prohibited asset, it is a viable investment for your self-directed IRA.

What are the advantages of using an LLC versus just having my self-directed IRA purchase an asset? 

Some advantages of using an LLC in your self-directed IRA include:

  • Control: You have a checkbook that is linked to a checking account that is set up in the name of your LLC under its own tax ID number. When you identify an investment that you want to purchase, you can just write a check. You don’t have to fill out paperwork, get approval from the administrator, or wait for someone else to fund the investment. You can take care of it yourself. This can be particularly helpful in investments that have a limited time period or are being auctioned.
  • Cost: Checkbook control can help you avoid transaction and check-writing fees that are typically associated with a self-directed IRA. If there are multiple investments in the LLC, IRAR only charges you for one asset held, the LLC.

Why doesn’t my broker and current custodian allow an IRA LLC in my account? He said it's not allowed. 

Brokers sell stock market–based investments. Many brokers don’t understand self-direction and discourage their clients from engaging in it. Remember, your broker was trained to sell you stocks, mutual funds, CDs, and bonds.

Can the IRA manager who manages the Checkbook LLC use the funds to pay the earnest money and closing costs? 

Yes. If an IRA invests in an LLC, the cash that is under the LLC checking account can be used to pay the earnest money when purchasing a rental property and pay closing costs too. With a Self-directed IRA with checkbook control, the account holder manages all deposits and withdrawals.

Can an IRA-owned LLC invest in crowdfunded real estate deals (through RealCrowd, Fundrise, and so on)? 

Yes. LLCs funded by IRAs can participate in crowdfunded investments, provided these investments adhere to the rules of prohibited transactions. An IRA isn't required to invest in an LLC to partake in crowdfunding. It can invest directly.

If I have an SDIRA LLC and I am over 59 ½, can I withdraw funds from the IRA at any time for personal use, or do I need to dissolve the LLC before I can have access to these funds? 

Distributions from an IRA can be taken at any time even if it is invested in an LLC. The distribution will be taxed depending on the type of IRA the LLC is held under (e.g., Traditional versus Roth IRA). If you funded your self-directed checkbook IRA with Roth funds, your distributions may not be taxed.

Can the manager of the LLC who is also the IRA owner perform investment property management functions? 

It is not advisable for the disqualified person (e.g., the IRA account owners) to perform services on an investment held under their own IRA. Performing services is one of the functions listed under IRC 4975 may be considered a prohibited transaction. You can hire a property manager to manage the investment property. They would get paid from the LLC's bank account and they would deposit rents to the same account.

How are assets and cash held for both the LLC and/or the actual self-directed IRA account? 

All are considered held under the IRA (i.e., both the LLC and checking account). The title of the checking account must be in the name of the LLC owned by the IRA. Any distributions to the IRA holder must be sent to IRAR for proper reporting to the IRS.

If I control 65 percent of my small business (an LLC), can I buy shares in the company with an IRA? 

Technically no, because you already own and control the LLC. Therefore, the LLC is a disqualified entity and any transaction with the LLC is prohibited.

Can I do a personal guarantee for the loan to the LLC owned by my IRA? 

Unfortunately, no, because a personal guarantee could be viewed as an extension of credit to the LLC.

If I purchase a condo through my IRA LLC, can I use the condo for personal purposes as well as investment purposes? 

Using a condo owned by your IRA would be a prohibited transaction.

Can my IRA LLC partner with my non-IRA LLC on a real estate purchase? 

According to industry practice, yes, but only at the initial purchase. Expenses and income must be allocated according to the percentage of ownership as well.

Can I purchase a property owned by my IRA LLC? 

If an IRA owns an investment, the IRA holder cannot purchase the investment from the IRA. The investment can, however, be distributed in kind and re-registered under the IRA holder’s name.

Can my IRA LLC get a loan to purchase real estate? 

Yes, a non-recourse loan. However, not all banks offer non-recourse loans. Contact us for a list of providers that our clients have used.

Does the IRA need to own all of the member shares of the LLC? 

No. The IRA can partner with anyone at the time of initial purchase on a newly created LLC. The ownership percentage will equal the capital contribution amount of each member. Once that initial investment has been made, the IRA cannot partner with a disqualified person as defined under IRS Code 4975.

Do the costs involved in forming the IRA LLC have to come from the IRA? 

Yes. The IRA needs to pay any amounts incurred to form the IRA LLC. Paying with personal funds may be considered a prohibited transaction.

Do I have to file taxes on the LLC that is in the IRA? 

It depends on the nature of the income received. If the income is from a trade or business, then yes.

Can the IRA LLC be based in a different state than your residence? 

Yes. Check with the state for entity-forming costs and ongoing registration and licensing fees.

What can my IRA LLC invest in? 

The IRS does not have a list of approved investments for retirement plans. However, it does list what is not allowed as an investment:

  • Collectibles: Art, antiques, gems, coins, or alcoholic beverages, and certain precious metals.
  • Life insurance (see IRC Section 408(a)(3))

Also, trusts that qualify as an IRA are not eligible to be shareholders of an S corporation (see Revenue Ruling 92-73).

What are the benefits of an IRA LLC Checkbook? 

An LLC checkbook offers some key benefits to investors. Among the top benefits are:

Crowdfunded investments. IRA-funded LLCs can invest in crowdfunded investments as long as the investments comply with the prohibited transaction rules. An IRA does not have to invest in an LLC to invest in crowdfunding. It may invest directly.

Tax advantages. The IRA LLC can be based in a different state than your residence, allowing you to choose a state that offers tax advantages and business-friendly regulations. Check with the state for entity-forming costs and ongoing registration and licensing fees.

Greater control and lower expenses. Investors who choose to use an LLC over just using a self-directed IRA to purchase an asset have more control over the desired asset. Purchases can be made directly by simply writing a check. You don’t have to fill out paperwork, get approval from the administrator, or wait for someone else to fund the investment. Avoiding transaction and check-writing fees that are typically associated with a self-directed IRA is another way it can reduce costs for investors. 

What Are the Rules and Restrictions on LLC Checkbook Control IRAs? 

Here are some stipulations to keep in mind when it comes to LLC checkbook IRA rules:

  • Withdrawing funds. If you have a self-directed IRA LLC and are over 59 ½ years of age, you can withdraw funds from the IRA at any time without dissolving the LLC to access them. IRA distributions will be taxed depending on the type of IRA the LLC is held under (e.g., Traditional versus Roth).
  • Prohibited transactions. Certain transactions cannot be carried out by a disqualified person when it comes to LLC checkbook control. It’s important to be aware of prohibited transactions, as they can cause penalties and can even result in the disqualification of your IRA. For instance, purchasing a condo through your IRA LLC for personal purposes as well as an investment property with your IRA would be a prohibited transaction
  • Share ownership. Investors who control 50 percent of a small business (an LLC), can’t buy shares in the company with an IRA because you already own and control the LLC. Therefore, the LLC is a disqualified entity, and any transaction with the LLC is prohibited.
  • Personal guarantees. Investors aren’t allowed to do a personal guarantee for loans to an LLC owned by their IRA because a personal guarantee could be viewed as an extension of credit to the LLC.
  • Partner purchases. An IRA LLC partner and a non-IRA LLC can partner on a real estate purchase, but only at initial purchase. Expenses and income must be allocated according to the percentage of ownership as well.
  • Prohibited purchases. While the IRS does not have a list of approved investments for retirement plans it does list what is not allowed as an investment. Included in that list are collectibles such as art, antiques, gems, and coins, as well as alcoholic beverages and certain precious metals. Life insurance (see IRC Section 408(a)(3)) is on that list as well. Also, trusts that qualify as an IRA are not eligible to be shareholders of an S corporation (see Revenue Ruling 92-73).
  • Purchasing IRA LLC property holdings. If an IRA owns an investment, the IRA holder cannot purchase the investment from the IRA. The investment can, however, be distributed in kind and re-registered under the IRA holder’s name.
  • Real estate loans. The IRA LLC can get a non-recourse loan to purchase real estate. However, not all banks offer non-recourse loans. Contact us for a list of providers that our clients have used.
  • Member share ownership. The IRA does not need to own all of the member shares of the LLC. It can partner with anyone at the time of initial purchase on a newly created LLC. The ownership percentage will equal the capital contribution amount of each member. Once that initial investment has been made, the IRA cannot partner with a disqualified person as defined under IRS Code 4975.
  • Start-up costs. The costs involved in forming the IRA LLC have to come from the IRA. In other words, the IRA needs to pay any amounts incurred to form the IRA LLC. However, be aware that paying with personal funds may be considered a prohibited transaction.
  • Taxes. Investors are required to file taxes on the LLC in the IRA depending on the nature of the income received. For example, taxes are required to be paid if the income is from a trade or business.
  • LLC Manager. The manager of the LLC can use the funds in the IRA to pay the earnest money and closing costs on LLC purchases. 
  • Property Manager. It is not advisable for the manager of the LLC to perform property management functions when that manager is the IRA owner. This is because services performed by a disqualified person for an investment held under the IRA are considered prohibited transactions as outlined under IRC 4975.

What Is UBIT and How Does it Work? 

IRAs normally enjoy tax-sheltered growth, but UBIT can apply in a specific situation. IRAs themselves are considered tax-exempt entities. However, UBIT kicks in if your IRA invests in a business that isn't related to its purpose of retirement savings. This applies to actively run businesses, not typical investments like stocks or bonds.

For instance, if your IRA buys a restaurant, the income from running that restaurant could be taxed under UBIT. The key here is the IRA directly owning and running a business, not simply investing in a company that runs a business.