Investing with a Self-Directed IRA LLC
Greater control and flexibility with your IRA funds
An IRA LLC (also known as Self-Directed IRA LLC, Self-Directed IRA with Checkbook Control, Single Member LLC, or Checkbook IRA) is an IRS-compliant structure that provides real-time access to your IRA funds. The IRA LLC offers flexibility in investment choices, including real estate, private loans, and other standard and alternative assets. It enables immediate control, allowing for quick decision making and swift action on investment opportunities. Earnings generated by the IRA LLC are tax-deferred until distributed from the IRA, and possibly tax-free in the case of Roth IRAs. Investors interested in an IRA LLC should ensure they understand the requirements and benefits of this structure to make an informed decision.
IRA Restrictions
Restrictions and prohibited transactions on Single Member IRA LLCs are the same as if the property was directly held with the IRA. It is critical for IRA LLC holders to adhere to the rules to avoid penalties and to maintain the account’s tax advantage status.
The IRS requires IRA real estate to be for investment purposes only and has rules regarding how real estate can be purchased and used. IRC 4975 also provides a list of disqualified persons that your IRA cannot transact with. It is important to understand these rules and the IRS definition of the term “disqualified persons.”
Disqualified persons: These are people who cannot benefit from the property owned by the self-directed IRA. This includes the account holder, his or her parents, grandparents, spouse, children and grandchildren and their spouses, and great-grandparents and great-grandchildren. These are called “lineal ascendants and descendants.” For example, you cannot rent a flower shop owned by your IRA to your child. See IRC 4975 for a full list of disqualified persons.
Prohibited transactions: A self-directed IRA cannot own any property that is used for the personal benefit of the account holder or any disqualified person. For example, you cannot run your business out of a building owned by your IRA or live in a house owned by your IRA. If an IRA owner engages the IRA into these types of transactions, it could lead to a disqualification of the IRA and an immediate distribution of the entire account with possible taxes and penalties incurred. You cannot lend money to yourself to a disqualified person with your IRA LLC.
Prohibited transactions may also include:
- The account holder acting as property manager.
- Repairs and Maintenance – The account holder or any disqualified person, such as a child, cannot perform any repair or maintenance work on the property. This type of work must be done by a third party and services paid by the IRA LLC.
- Purchases and Sales – The account holder cannot buy or sell property to or from the IRA. Properties held in an IRA cannot be purchased from or sold to a disqualified person.
- Use of Property – Disqualified persons may not live in, rent, or use in any way property owned by the account holder’s IRA.
- Please see IRC 4975 for a complete list.
Income and Expenses
When managing an IRA LLC, it is important to understand the flow of expenses and income. All income generated from the investments owned by the IRA LLC must be deposited into the LLC bank account and any expenses associated with those investments must be paid from the LLC bank account. It is especially important to remember not to pay for any expenses with your personal credit card; you must use the debit card that is connected to the IRA LLC bank account. Any reimbursements would be considered a prohibited transaction.
Annual Valuations
Community National Bank (CNB) must file Form 5498 annually for every IRA account. One of the purposes of the form is to provide the IRS with an updated value of each IRA. We will reach out to account holders towards the end of each year to request the fair market value of their IRA. For IRA LLCs, we will not ask for a breakdown of each investment in the IRA LLCs, nor do we ask for a record of deposits and income. Rather, a valuation of the combined cash and assets held in the IRA LLC is sufficient. For example, if the IRA LLC has $10,000 cash in it’s checking account, owns a $100,000 piece of real estate, and is the holder of a note valued at $50,000, then the fair market value of the IRA LLC is reported as $160,000. We will ask that you complete our LLC Valuation Form, which can be found on our forms page in a PDF or DocuSign version.
Steps to set up an IRA LLC
First, investors must establish a Self-Directed IRA with a Self-Directed IRA custodian, such as CNB Custody. Our experienced staff will work closely with you by providing educational resources to assist you with the rules for IRA LLCs. CNB has the expertise to help guide you, answer any questions, and make the process easy. You can be assured that your calls and emails will be answered promptly, and you’ll receive the attention you deserve every step of the way.
- Transfer funds from an IRA you have with another custodian. Simply fill out our transfer request form to get started. Transfers do not prompt IRS reporting, taxes, or penalties because they are not considered taxable events.
- Rollover from another IRA custodian. Your current custodian will send funds directly to you as the account owner. You have 60 days from receipt of the funds to roll them over to another IRA and avoid taxes and penalties on the distribution. This is considered an indirect rollover and is reported to the IRS on Form 5498 since the initial transaction is a distribution. Only one indirect rollover is allowed per 12-month period.
- Rollover from a 401(k), 403(b), governmental 457(b) account, or other qualified plan. These are considered direct rollovers and are reported to the IRS; however, the rollover would not be taxable since the funds are still held within a qualified plan. You will be required to contact your employer's plan provider with instructions to begin the rollover.
- Contribution. Simply complete our contribution form and return it with the amount you would like to invest. Check with your tax advisor to be sure you are eligible for a contribution and the amount you are eligible to make.
An ERISA attorney or IRA LLC facilitator generally prepares the LLC paperwork. They will file Articles of Organization with the Secretary of State's office and prepare a specialized Operating Agreement. The operating agreement includes provisions related to retirement plan restrictions as outlined in Internal Revenue Code sections 408 and 4975. The LLC member is titled as "Community National Bank CUST FBO (Account Owner Name) (IRA type) (Account #)" in the official paperwork. The non-compensated manager of the IRA LLC is generally the IRA account holder.
Once the LLC Operating Agreement is created, CNB needs to review it for custody to be certain we can hold the LLC within an IRA. Complete the Single-Member LLC Request for Custody form and Certification of IRC 4975 form send them to us along with the LLC operating agreement for review.
After the LLC has been accepted for custody by CNB, the manager of the LLC (typically the manager is the IRA owner) will take the IRA LLC paperwork to their preferred Bank to open a business checking account. You can order checks along with a debit card, if you choose. Generally, the manager has the authority to open accounts, endorse checks, execute contracts, etc.
Once your Self-Directed IRA is funded, you will complete the Investment Authorization Form with the investing details and provide us with the wire instructions to the LLC Bank account.
Investments purchased by the IRA LLC will be registered in the name of the IRA LLC. The account holder, acting in the capacity of the non-compensated manager of the IRA LLC, uses the IRA LLC checkbook to make transactions. They can purchase investments in real-time, pay bills, and then deposit income back into the checking account.
For answers to questions about real estate options, please email realestate@cnbcustody.com, or call 800-680-0340 and ask for the real estate team.