Occasionally, we get asked if limited liability companies (LLCs) are allowable investments for Self-Directed IRAs. The answer is yes – and they are frequently excellent vehicles for Self-Directed IRAs, depending on the circumstances. They allow for more direct control of IRA assets, and it is even possible to set up a checking account in the LLC’s name to handle transactions made by the IRA.
An LLC within a Self-Directed IRA can also help facilitate joint ventures – if you do not have the assets within your Self-Directed IRA to purchase the entire property, and you do not want to or cannot get a mortgage, your LLC within your Self-Directed IRA can be a partner in the investment along with other entities not related to the Self-Directed IRA at all.
The IRA can be a member in an LLC that is jointly owned by multiple partners. This is frequently the case when Self-Directed IRAs take ownership positions in closely-held family businesses and farms, or when buying apartment buildings and commercial real estate properties.
LLCs within IRAs also may require additional care and due diligence on the part of the Self-Directed IRA owner – especially in the case of single-member LLCs.
Here is what Self-Directed IRA investors should bear in mind when considering investing Self-Directed IRA assets in an LLC:
- If you are holding your LLC within an IRA, it is the IRA, not you, who should be listed as the member.
- You need an operating agreement document tailored for your Self-Directed IRA. You cannot use the standard operating agreement that most attorneys use for their standard LLC products.
- You must send a copy of the managing operating agreement to American IRA or whatever custodian or third-party Self-Directed IRA administrator you select.
- You must maintain a strict separation between your own personal finances and those of the IRA.
- You cannot act as a personal guarantor or offer any assets outside of the IRA as collateral for any loans taken out by the LLC within a Self-Directed IRA.
- You cannot use the LLC to invest in life insurance, collectibles, gems, jewelry, certain kinds of gold and precious metal coins and bullion of insufficient or inconsistent purity, or alcoholic beverages.
- If you purchase an investment property using an LLC within a Self-Directed IRA, you cannot use the property for your own personal benefit or convenience, nor for the benefit of your spouse, children, grandchildren, parents, grandparents or those of your spouse’s, nor for any entities they control.
- Your LLC within your Self-Directed IRA cannot pay a salary to any of the above individuals, nor transact directly with any entities they control.
- You cannot let your financial advisor, attorney, real estate agent or other fiduciary who gives you advice on your Self-Directed IRA or the LLCs within it to use the property for their own benefit or convenience.
Violations of these prohibited transaction rules could result in the IRS disallowing your IRA, potentially causing severe unwanted taxes and penalties.
LLCs in self-directed and Self-Directed Real Estate IRAs can be invaluable in establishing limited liability – thus helping wall off other assets in the IRA from being seized by creditors with claims against the property or asset within the LLC. But investors should use extreme caution – particularly when using the ‘checkbook control’ technique. This is an advanced strategy that should only be undertaken with the assistance of experienced tax and legal counsel.