Internal Revenue Code allows investors to hold a variety of assets through a Limited Liability Company (LLC) through their Individual Retirement Account (IRA) — 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 LLC checkbook control and IRAs.
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.
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.
Some advantages of using an LLC in your self-directed IRA include:
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.
Yes. If an IRA invests in an LLC, the cash that is under the LLC can be used to pay the earnest money in purchasing a property and pay closing costs as well.
Yes. 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.
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).
It is not advisable for the disqualified person (e.g., the IRA owner) to perform services on an investment held under their own IRA. Performing services is one of the functions listed under IRC 4975 that is considered a prohibited transaction.
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.
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.
Unfortunately, no, because a personal guarantee could be viewed as an extension of credit to the LLC.
Using a condo owned by your IRA would be a prohibited transaction.
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.
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.
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.
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.
Yes. The IRA needs to pay any amounts incurred to form the IRA LLC. Paying with personal funds may be considered a prohibited transaction.
It depends on the nature of the income received. If the income is from a trade or business, then yes.
Yes. Check with the state for entity-forming costs and ongoing registration and licensing fees.
The IRS does not have a list of approved investments for retirement plans. However, it does list what is not allowed as an investment:
Also, trusts that qualify as an IRA are not eligible to be shareholders of an S corporation (see Revenue Ruling 92-73).
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.
Here are some stipulations to keep in mind when it comes to LLC checkbook control:
UBIT (Unrelated Business Income Tax) is a tax on tax-exempt entities such as IRAs for income related to trade/business activities. Certain incomes are carved out from taxation (e.g., rental income, interest, dividends).
IRA-owned LLCs are typically subject to Unrelated Business Taxable Income (UBIT) if the LLC engages in a transaction that is considered a trade or business. However, there is certain income that is exempt from UBIT, such as rents and dividends (see IRS publication 598), which are not taxable for IRAs. If the IRA investment is leveraged (e.g., purchased using a non-recourse loan), the portion of income received in relation to the amount borrowed may be taxable even if typically exempt, such as with rents.