Legal Rules for Self-Directed IRA LLCs
Assets a Self-Directed IRA LLC Cannot Purchase
Need for Special Advisor
There are very specific and often complex rules that apply to investments made by a Self-Directed IRA LLC. The purpose of the IRA is to provide for your retirement in the future. Because the owner of the IRA has total control over the investments, the primary thrust of the rules are to ensure that the Self-Directed IRA LLC owner or people considered close to the owner (disqualified person) do not receive benefits from the investment before the IRA is terminated or the investment is distributed to the owner. If an IRA account holder does not adhere to some of the rules, the IRA could lose its tax-exempt status and the entire fair market value of the IRA would be treated as a taxable distribution, subject to ordinary income tax. In addition, the IRA holder is subject to a 10% early distribution penalty if the IRA holder is under the age of 59 1/2.
Generally, there are two types of transactions a Self-Directed IRA LLC should avoid: prohibited transactions and prohibited investments.
Assets that a Self-Directed IRA LLC cannot purchase (prohibited investment)
A Self-Directed IRA LLC can purchase almost any asset “except” the following. The purchase of any of the following is prohibited by an IRA.
In general, a Self-Directed IRA LLC cannot invest in life insurance contracts, S Corporation stock, or collectibles. Collectibles are defined as:
- Any work of art
- Any metal or gem
- Any alcoholic beverage
- Any rug or antique
- Any stamp
- Most coins
- S Corporation stock
Other than the above, the Self-Directed IRA LLC can invest in any asset.
The prohibited transactions rules are the ones that generally present the most difficulty for Self-Directed IRA LLCs. The stated purposes of these rules are to prevent self-dealing by IRA account owners and related parties (called “disqualified individuals”), and to avoid possible mismanagement and imprudent plan administration to help ensure that funds are available for your retirement.
Prohibited IRA transactions regarding an IRA include but are not limited to the following:
- Sale, exchange, or leasing of any property between an IRA or the IRA owned LLC and a disqualified person;
- The lending of money or other extension of credit between an IRA or the IRA owned LLC and a disqualified person;
- The furnishing of goods, services, or facilities between an IRA or the IRA owned LLC and a disqualified person;
- The transfer to or use by or for the benefit of a disqualified person, of the income or assets of an IRA or the IRA owned LLC.
- An act by a disqualified person who is a fiduciary whereby the fiduciary deals with the income or the assets of an IRA or the IRA owned LLC in his own interest or for his own account; or
- Receipt of any consideration by a disqualified person who is a fiduciary from any party dealing with the IRA or the IRA owned LLC in connection with a transaction involving the income or assets of the IRA or the IRA owned LLC.
* Disqualified Persons: The term, “disqualified persons” is defined to include the account holder and his or her spouse, lineal descendants, account fiduciaries, trustees, investment managers and advisers; and any corporate entity in which the account holder has at least a 50 percent ownership.
A violation of the prohibited transactions rules could result in the IRA losing its tax-exempt status. Loss of tax-exempt status would cause the entire fair market value of the IRA to be treated as a taxable distribution, subject to ordinary income tax. In addition, the IRA holder would be subject to a 10% early distribution penalty if the IRA holder is under the age of 59 1/2.
If you have any questions regarding whether a particular transaction would constitute a prohibited transaction please contact an attorney at our affiliated law office irataxlawyers.com.
Special Advisor for IRA Owned LLC
When you utilize a Self-Directed IRA LLC, some custodians require that the IRA account holder engage a professional to guide the decision and actions of the LLC. This is because once funds are transferred to the LLC, the IRA custodian has no control over or visibility to the investments made by the LLC (in fact the LLC is expressly established to give the IRA account holder this control), and thus the IRA custodian is no longer in a position to police compliance with the legal and tax rules governing IRAs.
Even if an IRA custodian does not require a Special Advisor when the Self-Directed IRA invests in and utilizes an LLC to make investments, it is advisable to engage a knowledgeable professional for guidance and assistance to ensure compliance..
A Special Advisor is generally an attorney or CPA with experience in tax and employee benefit plans. The role of the Special Advisor is to determine whether, with respect to any transaction or investment made by the IRA owned LLC, the transaction or transaction’s will be a prohibited transaction or generate unrelated business income. Obviously to be effective in this role, the Special Advisor must be consulted with respect to any proposed exchange, transfer, provision of goods and services, purchase, or sale involving the LLC or its assets. The key is to involve the Special Advisor before the transaction is undertaken or committed to.
The attorneys at irataxlawyers.com (our affiliated law office) serve as Special Advisor for most of our customers and would be delighted to do so for any customer. In fact, this service is provided without any additional cost to our customers who purchase the IRA Village Operating Agreement and LLC Formation.