Like a corporation, having an LLC shelters you from any personal responsibility for the entity’s debts and obligations.
Typically, executing transactions for your retirement account requires communicating electronically with your SDIRA provider or filing paperwork — leaving you (and your transactions) at the mercy of their processing speed. With an LLC, the funds you deposit into your LLC’s checking account are readily available. Your transactions become as simple as writing a check due to checkbook control.
Establishing checkbook control makes you less reliant on your custodian; you’ll file less paperwork. The less your administrator has to do on your behalf, the less they charge you.
There is also a potential cost-saving where SDIRA record-keeping fees are concerned. As the IRA’s investment is now simply the LLC rather than its underlying investments, you only pay for one asset.
The same three restrictions apply: you can’t invest in collectibles, s-corporations or life insurance.
Your SDIRA invests in and owns the LLC. Since an IRA is a tax-deferred entity, there is no taxable event in your IRA when investing through the LLC. It is vital, however, that any income or expenses relating to assets purchased by the LLC be paid to/from the SDIRA, which holds membership with the LLC to avoid taxation. Income from the LLC cannot be paid directly to you.
Depending on the type of income received by the LLC, it may be subject to unrelated business income tax (UBIT). The IRA may have to file a tax return if the income the LLC receives is taxable.
Taxable income received by an IRA, which is considered a trust, is taxed at trust tax rates. Income derived from a trade or business is taxable to the IRA. Income received from a leveraged investment will be taxable on the leveraged portion.
Other incomes such as interest, rents, royalties aren’t taxable income to the IRA. The IRS Publication 598 sheds additional light on this topic.
To establish your LLC you’ll need to create an LLC operating agreement and file paperwork in the state where the LLC is domiciled.
Consulting legal counsel that is knowledgeable about IRAs and the state laws governing them is advisable. A knowledgeable attorney can build parameters into the operating agreement that prevent the LLC from engaging in prohibited transactions.