If you have a Self-Directed IRA retirement account that owns a single-member limited liability corporation (LLC), you probably understand that when you used your retirement funds to purchase the LLC, the LLC became a separate entity. You may purchase assets and make investments through the LLC, and you might even have check-writing privileges.
One thing you cannot do, however, is to take a distribution from your LLC. Although a Self-Directed IRA owned single-member LLC can be used as its own investment vehicle, IRA distribution rules are still in effect, and any distributions must come from the IRA and not the LLC. Here is a brief review of distributions. In other words, what happens when you take money from your Self-Directed IRA?
What is a distribution?
A distribution takes place when funds are removed from a Self-Directed IRA and paid to the IRA’s owner. The IRA owner is then required to declare the distribution amount as income and pay taxes on it. The funds that are removed from the Self-Directed IRA lose their tax-deferred protection and are treated as income. The money is no longer subject to IRA rules, and the owner is free of any restrictions on what he or she may and may not do with it.
Also keep in mind that if you have reached the age of 70 ½, you must take into account that you will have required minimum distribution (RMD) rules to consider. The rules state that you must begin liquidating your tax-deferred plans when you reach that age. Once again, this does not change the distribution rules. Your RMDs must come from your Self-Directed IRA and may not be taken directly from your LLC.
How do you take a distribution if you have an LLC?
Taking a distribution can be confusing, especially if you have only recently opened your Self-Directed IRA LLC. The LLC will require an extra step whenever you take a distribution. Here is an example to show you how it works:
In the following scenario, the owner of the Self-Directed IRA LLC wants to take a $20,000 distribution. Since most of the owner’s funds are in the LLC, there is not enough cash in the IRA to cover the distribution. Many Self-Directed IRA owners mistakenly believe they can take the distributions from the LLC. After all, that is where the funds are located.
But those funds must flow back to the Self-Directed IRA first, and then they can be distributed to the owner. Remember, you are the owner of the IRA, but the Self-Directed IRA owns the LLC. So, the LLC would need to send funds back to its owner, your IRA. As the manager of the LLC, you would send a $20,000 check to the IRA, after which you would request a distribution from the Self-Directed IRA’s administrator. The administrator processes the request, cuts a check for $20,000 to you personally, and issues a 1099 for the distribution amount.
You must declare the $20,000 as income for the year in which you took the distribution, and you must pay taxes on it by the following April 15th.
You cannot take a distribution from the LLC!
In summary, Self-Directed IRA owned single-member LLCs do not change the rules and requirements of distributions. As the manager of the LLC, you may not write yourself a check and call it a distribution. You, your IRA, and the LLC are three separate legal entities. Do not confuse yourself with your IRA. And do not confuse your Self-Directed IRA with the LLC!
Let us use our experience to help you
At American IRA, we work with Self-Directed IRAs every day. With our simplified process, you can quickly and easily take care of your investment transactions.