When many investors learn they can hold an LLC within a Self-Directed IRA—thereby giving themselves checkbook control within an IRA—they tense up. After all, there are a lot of rules governing how a Self-Directed IRA should work, and you don’t want to get fined by the IRS for a simple mistake. However, it’s easier to establish an LLC within a Self-Directed IRA than you might think. And by working with a Self-Directed IRA administration firm with experience, you can easily avoid these pitfalls. But what are those pitfalls, and how can you be aware of them so you can have a smooth LLC investing experience? Here’s what you’ll need to know.

Pitfall #1: Prohibited Transactions

One of the most common pitfalls when setting up a Self-Directed IRA LLC is accidentally engaging in prohibited transactions. What are they, exactly? Simply put, the IRS has strict rules regarding who you can interact with and how you can invest within your IRA. For example, you can’t use your IRA to buy property from or sell property to a “disqualified person,” which includes you, your spouse, your descendants, or any fiduciary managing your IRA. Carrying out a transaction like this can lead to hefty penalties and potentially disqualify your IRA.

To avoid prohibited transactions, always start by learning who a disqualified person is. A disqualified person is anyone you know—such as a relative, close family member, or business partner—who might benefit from using assets your IRA holds. If they do benefit from it, it would create a benefit that the IRS interprets as a non-retirement benefit, which means paying penalties. Instead, only carry out transactions with valid, qualified individuals—people who are not so close to you that transacting with them would create a benefit for you.

Pitfall #2: Not Having Proper Documentation of the IRA LLC

When you set up an LLC within your Self-Directed IRA, it’s crucial that the ownership of the LLC is properly documented so you can point to all the paperwork. For instance, the LLC should be owned by the IRA itself, not by you personally. This is a common mistake that could result in disqualification of your IRA.

The Self-Directed IRA administration firm you work with should help guide you through this process and ensure the paperwork is properly filed. It sounds complicated, but with a Self-Directed IRA administration firm in your corner, it’s easier than it sounds.

Pitfall #3: Personal Use of LLC Assets

Another frequent pitfall is the temptation to personally benefit from the assets you hold within your LLC. This is a prohibited transaction known as “self-dealing.” For instance, if your Self-Directed IRA LLC purchases a rental property, you or your immediate family cannot stay in that property, not even for one night. Why not? Simply put, that would be considered personal use.

Avoid this by maintaining a clear separation between your personal finances and the investments held by your Self-Directed IRA LLC. Always use the LLC’s funds for expenses and repairs related to the investments, and never dip into personal accounts to cover costs.

These are just a few of the common pitfalls of LLCs within retirement accounts. But they sound more complicated than they are. If you simply use LLCs to invest in valid retirement assets and avoid self-dealing and prohibited transactions, you’d be surprised how much freedom and flexibility these accounts can give you. Want to know more about how it all works? Eager to get the process started? Reach out to us here at American IRA by dialing our number at 866-7500-IRA.