Estimates reading time: 5 minutes 40 seconds
Every month we like to collect questions asked by our webinar attendees to provide the best answers to all those investment inquiries. This month of June we discussed IRA LLCs, and what mistakes to avoid when investing with one. These questions range from using your IRA LLC property for personal use, to rolling over an IRA LLC. Here are some hand-picked from real prospective and current investors:
Q: If I have a 401(K) that is still with an old employer, can I transfer it to an individual K Plan and do the same with it as with an IRA LLC?
A: To answer your first question, you can rollover your previous employer’s 401(k) account into an Individual 401(k) as long as you are an employer eligible to establish a 401(k) plan. Reason being, only employers can establish an employer sponsored plan such as a 401(k) (IRS Publication 560). As far as the 401(k) investing in an LLC, that is possible as well. Keep in mind you already have control over the plan’s checking account under the plan’s name (self-trusteed plan). It is always best to check with your legal or tax advisor to guide you through these issues before proceeding.
Q: Can one LLC serve both my wife and my IRA accounts? Can we be listed as shareholders or only as managers?
A: Besides a single member LLC, it is very possible for you and your wife to be shareholders/members investing in a business that is structured as an LLC managed by another party. There are thresholds of ownership under IRC 4975 that could cause the entity to be disqualified.
If you are planning on setting up a single member LLC in which your IRA owns more than 50% of the ownership interest, it is not advisable for your spouse to be a shareholder/member. Again, we highly recommend to seek the guidance of a competent tax and or legal advisor before proceeding. Internal Revenue Code 4975(e) (2) defines a corporation, partnership trust etc. that is owned at least 50% directly or indirectly by a disqualified person. You and your spouse are disqualified persons.
Q: If I purchase a condo through a LLC can I use the condo for personal purposes as well as investment purposes?
A: Unfortunately no. Internal Revenue Code 4975 strictly prohibits it. There is a frequently asked question devoted to prohibited transactions in the IRS website. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions It is advised to stay away from prohibited transactions since the effect to the IRA will be the IRA will cease to be an IRA as of January 1st of the year in which the prohibited transaction occurred which means all assets in your IRA will be taxable and subject to potential penalties.
Q: Can I and my IRA both be partners in the LLC?
A: If it’s a single member LLC it would be recommended to avoid such an arrangement to avoid entering in to a prohibited transaction. You may also apply for an advisory opinion with the Department Of Labor to have the department give you their opinion on your situation before proceeding to avoid the repercussions of a prohibited transaction.
Q: Can my IRA LLC partner with my non-IRA LLC on a real estate purchase?
A: It is under the self-directed IRA industry’s opinion you may on a simultaneous purchase property even with a disqualified party since the initial transaction deals with a third party. Keep in mind however, careful attention must be made to making sure that income and expenses are paid and returned back to the correct IRA proportionate to their level of ownership.
Q: Can property owned by IRA, or IRA LLC be sold to owner of IRA as an IRA distribution?
A: An IRA cannot sell the property to the IRA holder since that would be considered a prohibited transaction. In a sale, which is much different than a distribution, cash is used to replace the property which is held under the IRA, even at fair market value. IRC 4975 states that there can be no sale, or exchange between the IRA and disqualified person.
However, the property in the IRA may be distributed/withdrawn from the IRA in cash or in-kind. The distribution will be reportable to the IRS under the IRA holder’s name and social security number. The reportable value of the distribution will be based on the fair market value at the time of the distribution (may require an appraisal). If distributed in-kind the title of the property will also have to be changed from the IRA to the IRA holder’s own name and may have additional fees such as recording fees etc.
Q: If I have and LLC already set up can I then roll another 401k or IRA into the established IRA/LLC ?
A: This question may be more complicated than it appears. It would be best to present the situation to your tax advisor or legal advisor before proceeding. There may also be a situation where it would be advised by your tax or legal advisor to present the facts to the department of labor who is in charge of providing advisory opinions. Advisory opinions are documents that a tax payer can rely on that shows the department’s opinion regarding your specific situation. Applying for an advisory opinion has no cost to it but may take some time before getting an opinion.
Q: If I have a rollover from another SEP IRA can I put those funds in the LLC I set up?
A: A SEP IRA is just a Traditional IRA that received a SEP contribution. In a nut shell you can consolidate your SEP, Traditional or other retirement plans and invest in an LLC.
Q: If the LLC is partially owned by me and partially owned by the IRA can I put sweat equity into a property? Do the percentage ownerships matter?
A: First, it is recommended to have your legal or tax advisor determine whether it is to your best interest to be part owner of the LLC that your IRA invests in. If you personally, or your IRA own at least 50% of the LLC, there are ownership thresholds stated under the prohibited transaction rules under IRC 4975 that need to be looked at to make sure not to violate the prohibited transaction rules.
As far as sweat equity, it is best to stay clear of providing any sweat equity on a property that your IRA has ownership interest in to avoid prohibited transaction issues. There are no percentages stated In the code nor percentages stated in regulations that clearly allow for such a transaction to avoid engaging in a prohibited transaction.
We encourage our readers to post any additional questions regarding real estate IRA LLCs in the comments section below so other readers may benefit from the answers. Or contact one of our trained professionals for a quick chat. Please visit out Entrust Learning Center for further resources.