What is an IRA LLC and When Should I Consider Investing Through One?
Flexibility in retirement savings is essential for navigating market opportunities, diversifying your portfolio, and maximizing potential growth. For savvy investors who want even greater control over their retirement dollars, an IRA LLC offers a unique solution. With this arrangement, you, as the LLC manager, take charge of overseeing investment decisions and administrative tasks. This means you can directly manage transactions like purchasing real estate or alternative assets without needing approval for every step. Income from these investments flow back into the IRA-owned LLC, where it can continue to enjoy the potential tax advantages associated with IRAs, making reinvestment seamless and efficient.
Simply put, an IRA LLC puts you in the driver’s seat, streamlining real estate and other investments and managing your retirement portfolio with ease.
IRA LLC, Defined
An IRA LLC is an investment vehicle for a self-directed retirement account that can be a powerful tool for investors looking to expand their portfolio with alternative assets. Unlike most directly held investments, an IRA LLC provides two key benefits: greater flexibility and immediate control.
With this structure, you can diversify your investments into real estate, private businesses, precious metals, cryptocurrency, or other non-traditional assets.
How IRA LLCs Work
The process of setting up an IRA LLC is simpler than it might seem. In an IRA LLC structure, you set up a self-directed IRA, which is the member and owner of the LLC, and you are the manager and decision maker. Your custodian will fund the LLC and, as the manager of this entity, you can sign contracts for the LLC and use its business bank account to handle transactions easily and efficiently. All cash in the IRA LLC must be returned to the IRA once you are ready to close down the investment.
Here’s how to get started with your IRA LLC:
- Open a self-directed IRA: Select a self-directed IRA through your preferred financial institution.
- Open a properly structured LLC: Create an LLC specifically geared for your IRA investments. Different states have unique LLC requirements, so be sure to consult with a trusted expert.
- Set up a bank account for your LLC: Set up a business checking account at your preferred institution.
- Send funds to your IRA LLC: Direct your custodian to fund your IRA LLC. These funds must come directly from your IRA and may not be funded personally with non-IRA funds.
- Invest in assets: Purchase the real estate or alternative assets you’d like directly from your IRA LLC checking account.
What Are the Tax Implications of an IRA LLC?
One of the biggest advantages of an IRA LLC is how your investment gains are handled. Any profits from your real estate investments flow back into the IRA-owned LLC, where they can be reinvested and continue to grow tax-deferred until the funds are withdrawn. If your LLC is owned by a Roth IRA, those gains can even grow tax-free. Refer to IRS guidelines regarding the taxation of IRAs and consult your tax advisor prior to investing.
Who Should Use an IRA LLC?
The IRA LLC structure has been increasingly popular among real estate investors and other investors who prefer alternative assets. Should your IRA LLC become exposed to debt or legal issues, the LLC structure reduces your legal liability as being held personally responsible – and protects your personal assets like a home and savings. As a custodian, Forge Trust cannot offer legal or investment advice, so it’s imperative you properly maintain the LLC’s structure, keeping business and personal finances separate.
Prohibited Transactions in IRA LLC Structures
Though the IRA LLC structure is quite flexible in terms of the types of alternative assets it allows you to purchase, prohibited transaction rules still apply, and it’s important to note that there are important limitations to consider. With an IRA LLC, your IRA can only buy or sell real estate with unrelated third parties. It is prohibited to do business with properties you already own or close family members and business partners, which are known as “disqualified persons.” Additionally, you cannot use the property for personal use or perform any hands-on work on a property purchased by your IRA LLC, as doing so could be considered a prohibited transaction.
Add Real Estate to Your Retirement Portfolio with Forge Trust
To set up an IRA LLC, it’s crucial to work with a custodian familiar with the opportunities and legal and tax implications of this structure - however, as a reminder, Forge Trust cannot offer legal or investment advice. Make sure to stay up to date on IRA rules, including avoiding prohibited transactions and refraining from taking any salary or compensation, in order to help safeguard compliance and maximize the benefits of this flexible investment structure.
Contact us if you have any questions for our dedicated account service team or would like to start working with Forge Trust today.
Zander is a seasoned product leader with a 12-year history in financial technology, specializing in private market investments. His tenure includes roles at LTSE, Alto, and IHS Markit, where he focused on product management and strategy. Zander holds an MBA from Vanderbilt University, focusing on International Business, and a B.A. in Economics from Colby College.