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You Asked, We Answered: LLCs in Self-Directed IRAs

Investing in LLCs with an individual retirement accountWe’re taking the time to answer more questions posed during our monthly National Webinars. This month, we’re focusing on investing in LLCs with self-directed IRAs. Requests range from elementary education about prohibited transactions to advanced insight into processes. A few will be especially interesting to small business owners with LLCs of their own. We, as administrators and not advisors, cannot give advice about specific investments and strategies. However, we aspire to provide answers and educational resources, or direction to legal issues, for all inquiries. Here are some of those questions hand-picked from real prospective and current investors.

Q: If I control 65% of my small business (an LLC), can I buy shares in the company with an IRA?

A: Technically no, since you already own and control the LLC. Therefore the LLC is a disqualified entity and any transaction with the LLC will be prohibited.

Q: Could I run across any problems from comingling personal funds in the LLC owned by my IRA, such as using my own computer to manage and monitor the LLC expenses?

A: Yes, you may. Any direct or indirect benefit received by the IRA holder (you) from an IRA investment may be categorized as a prohibited transaction. As an example, if you are providing a service that would otherwise be an expense for the IRA this would mean that you have indirectly benefited from the transaction. There is no minimum amount to define whether a transaction is prohibited or not.

Q: Can I do personal guarantee for the loan to the LLC owned by my IRA?

A: Unfortunately no, since a personal guarantee could be viewed as an extension of credit to the LLC. 

Q: As the sole proprietor of an LLC without any employees, do I need an EIN in order to open an Individual 401(k)?

A: We cannot address the tax issues for the LLC needing an EIN. For filing the Individual 401(k) plan, though, the answer is yes. Since 401(k) plan assets are separate from the employer’s assets, the 401(k) plan should get its own EIN. The EIN is also needed  to file an IRS Form 5500 when the assets of the trust reach $250,000. Again, it is recommended to keep the investments and filings of the 401(k) plan separate from the LLC’s records.

Q: I’m closing down my LLC, for which I have an Individual 401(k). How do I rollover my funds from the 401(k) into an IRA?

A: There are formal termination steps for terminating a 401(k) of a company closing down. Within the steps includes the rolling over assets from the 401(k) to an IRA. The steps are:

  1. Make sure the plan has completed all required amendments.
  2. Required contributions must be completed.
  3. Once the final dollars are distributed (or rolled over to another plan or IRA) and the balance in the plan is $0, a final IRS Form 5500 must be filed.

Do you have any questions of your own about investing in LLCs with a self-directed IRA? Or maybe you want further clarification? We want to hear from you. Let us know in the comments section below. Your question may even be featured in the next article.

For further information on any prohibited transactions and to avoid any unwelcome surprises before investing in LLCs, we recommend you take a minute to peruse our Learning Center or talk to one of our knowledgeable professionals. 

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