A self-directed IRA (SDIRA) can invest in or create an LLC. However, you should weigh the risks before investing. Here’s what you need to know.
What is a self-directed IRA?
A self-directed IRA is a type of retirement account that allows the owner to invest in alternative assets, including real estate, private company stock, precious metals, and much more.
How can a self-directed IRA invest in an LLC?
There are two ways a self-directed IRA can invest in an LLC:
- Become a member of an existing LLC
- Create a new LLC (sometimes called a self-directed IRA LLC or a “checkbook control LLC”)
When forming a new LLC, a self-directed IRA can either create a single-member LLC with the SDIRA as the sole owner or create a multi-member LLC in collaboration with business partners.
Learn more about How to Start an LLC.
How is a self-directed IRA LLC taxed?
LLCs are taxed as pass-through entities by default, which means the LLC profits “pass through” the business to the owners, who are then taxed individually on the income earned through the LLC. However, since IRAs have tax-deferred status, an SDIRA will typically not have to pay taxes on this income until money is withdrawn from the IRA. Even so, the owner of the LLC still needs to report this income to the IRS each year by filing Form 1065.
What are the risks of having a self-directed IRA LLC?
Investing in an LLC as a self-directed IRA is a legally complicated endeavor, and you should consult a tax attorney before going ahead with it. It’s important for SDIRA LLCs to follow IRS guidelines for prohibited transactions. The IRS states that an IRA owner or another “disqualified party” may not misuse IRA funds, which includes:
- Borrowing money from the IRA
- Selling property to the IRA
- Buying personal property with IRA funds
- Using the IRA as insurance on a loan
A “disqualified party” includes:
- The owner of the IRA
- The owner’s spouse and other family members
- Certain business associates
If you violate the IRS rules, you risk losing the SDIRA’s tax-deferred status and having to pay hefty taxes and fines.