Can My Self-Directed IRA Invest in an LLC?
At PENSCO, we are often asked if self-directed IRAs can invest in Limited Liability Companies (LLCs). Yes, an IRA may be able to invest in LLCs for retirement savings, but there are many factors to consider when considering this type of investment — such as who the owner is or what types of investments the LLC plans to make.
Furthermore, LLCs are legal structures that potentially reduce some of the legal liability of the individual partners or owners.
Here are a few reasons our clients have told us they used their self-directed IRA to invest in an LLC:
1. To create more control: Clients who want increased control to manage their IRA investments often establish single-member LLCs.
A single-member LLC is a private entity that is wholly owned by an IRA, and it may be able to invest in alternative assets like real estate or private equity. In this case, the IRA is the sole member of the LLC, while the IRA account owner is the manager.
PENSCO requires all IRA owners who invest in a single-member LLC to appoint a Special Advisor who is a CPA or Tax attorney familiar with the regulations related to prohibited transactions and unrelated business taxable income. The Special Advisor must act as agent for the IRA owner and review the transactions within the single member LLC to ensure compliance with all such laws.
2. To manage real estate investments: Investors who choose the single-member LLC approach usually do so because it provides them with the protection of an LLC, while also providing more flexibility to manage associated expenses. In the case of real estate, property expenses can be managed through the LLC bank account to cover unexpected maintenance or repairs (as long as the property is owned by the LLC, instead of by the IRA directly). This also may prove advantageous when the LLC is buying or selling property as it may be more efficient to handle such transactions within the LLC as opposed to buying directly through an IRA. Generally, it also allows them to pay only one asset maintenance fee to the custodian, versus paying maintenance fees to multiple properties.
3. To participate with multiple investors in a venture: Sometimes clients are presented with an investment opportunity, but don't have enough funds in their IRA to purchase the asset on their own. In this case, they can pool their IRA funds with other investors to purchase an asset.
To do so, the client directs their IRA to invest as a member along with other investors. The IRA becomes a member of the LLC and funds within it are used to fund the investment venture. Some common examples of this are investing in an apartment building or closely-held companies/startups.
Beware of Risks
While your self-directed IRA can invest in LLCs, it's important that the LLC doesn't run afoul of IRS rules — especially those regarding prohibited transactions or disqualified parties. You also should be aware of the fact that LLCs may generate income that creates a tax liability for your IRA.
For investors who aren’t familiar with the logistics of investing in LLCs through an IRA, we strongly recommend consulting with a tax or legal advisor who is familiar with these rules and who can help you ensure your IRA remains compliant. Visit our Professional Directory to find financial professionals who can help answer other self-directed IRA-related questions.
This blog is intended for general and or educational purposes only and is not intended as investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.