There are so many things you can invest in with a self-directed IRA. One popular investment inside of a self-directed IRA is to invest in a company with your self-directed IRA. We want to make sure you make the right choices when investing with your self-directed IRA. The following are some of the self-directed IRA rules for investing in a company with your IRA
Generally, your IRA can invest in almost any type of business entity. The two major exceptions are: (1) an S-corporation (due to the S-corp rules); and (2) any business owned or managed by a DQP (due to the IRS prohibited transaction rules – see Internal Revenue Code § 4975).
IRA-LLC: Your IRA can invest in a brand new LLC, purchasing its member units in exchange for IRA funds. The IRA owner may do this to segregate funds for different kinds of investments or for ease of asset management. For example, if an IRA buys a new LLC and uses the LLC’s cash to buy a rental property, the renters would simply write a check to the LLC rather than to the IRA. The LLC maintains a separate checking account to hold income from its activities and to pay expenses associated with its assets (such as property taxes, insurance, repairs, etc). An IRA-LLC can also reduce custodial fees, be quite useful for multiple-owner situations, and make transfers/sales easier (no retitling of LLC property, just transfer/sell the LLC’s member units).
For custodial reporting purposes, the LLC’s manager must report to AET a year-end valuation (and any pro-rata values for IRA members owning less than 100% of the LLC). If active income is generated, or debt used, the K-1 or valuation should state how much of the income allocated to the IRA member is subject to UBIT or UDFI.
Please be aware that the use of such an LLC does not get around the normal IRA rules. All the prohibited transaction rules, as well as UBIT/UDFI, still apply if the LLC is an IRA plan asset. This means you (and other DQPs) cannot receive compensation for managing it, personally pay LLC expenses, provide sweat equity to the LLC properties, get full-recourse lending, etc. Note that IRA contributions and distributions must still flow through AET, not any IRA-owned entity.
If you would like to invest in an existing company you can do so but you must make sure you are following specific guidelines. Contact us for help figuring out how to invest in an existing company with your self-directed IRA.
Operating Agreements: If 25% or more of an entity is owned by one or more retirement plans (including IRAs), then the “plan asset” look-through rules are invoked, meaning the entity assets will be deemed plan assets and the managers of the entity will become fiduciaries of the plan(s). If this might occur, the entity’s operating agreement should have special language preventing the possibility of a prohibited transaction. Many LLC providers, if they give an operating agreement at all, will provide one with generic LLC provisions, leading to a significant risk that an IRA investing in it may later become disqualified. AET might not accept unsatisfactory language. Please verify with your advisor that for any companies your IRA will be a substantial owner of (especially new IRA-LLCs), the operating agreement has the appropriate custom language.
We would love to help you invest in a new or existing company with your IRA. Please contact us today and we can get you on your way to investing with your retirement accounts.
Author: Ben Barker, Self-Directed IRA Professional
1.801.683.9291
ben@accuplan.net