By: My Solo 401k Financial Staff
August 21, 2014
Last Updated: May 24, 2020
An individual retirement arrangement (IRA) is a custodial account used to hold investments for an individual’s retirement.
After the passage of the Employee Retirement Income Security Act of 1974 (ERISA), IRAs were created by ERISA in 1975. Roth IRAs were created by the Taxpayer Relief Act of 1997.
IRAs are established with Insurance Companies, banks, credit unions, savings and loan associations, brokerage firms, or other organizations approved by the Internal Revenue Service (IRS).
A self-directed IRA (SDA) is an IRA that allows the IRA owner to pick the investments. Because the IRA trustee or custodian does not pick the investments, the IRA owner takes on the risk. Some of the investments that SDA owners direct their IRAs into are real estate, LLC and precious metals, to name just a few.
Commonly referred to as a Checkbook IRA or IRA LLC, when an LLC is 100% owned by an IRA or combination of IRAs, it is referred to as a Self-Directed IRA LLC. While the IRA owns the LLC through the purchase of member units, the same prohibited transaction rules applicable to the self-directed IRA apply to the IRA owned LLC.
There are many reasons the self-directed IRA LLC is popular for investing retirement funds, including the following:
Since the early 2000s the self-directed IRA owned LLC has grown in popularity as the common form of entity for placing real estate purchases, tax liens, precious metals, trust deeds, promissory notes and private placements, to name a few.
Checkbook Control over the IRA
A self-directed IRA owned LLC puts the IRA participant in control in placing the self-directed investments as the named LLC manager. The LLC investments can be processed by check or wire and are titled in the name of the LLC, not in the name of the IRA.
Reduce IRA Custodian Fees and Timely Process Investments
After investing the self-directed IRA in the LLC, as the manager start placing alternative investment purchases by writing checks or wiring funds from the LLC bank account. As a result IRA custodian processing fees and holding fees are greatly reduced and hold times are eliminated.
First, a Self-Directed IRA is created by completing and signing the IRA plan agreement provided by the IRA custodian.
Second, the former employer retirement plan or IRA funds are transferred to the new Self-Directed IRA custodian.
Third, MySolo401k.Net drafts Self-Directed IRA LLC operating agreement including specific IRA regulatory language, registers the LLC with the state and obtains EIN for the LLC from the IRS.
Fourth, MySolo401K.Net assists the LLC manager in opening the LLC bank account at his or her local bank.
Fifth, LLC investment directive along with the LLC documents are submitted to the custodian who then invests the IRA funds in the LLC by wiring the funds to the LLC bank account.
Finally, after the LLC bank account is funded, the manager of the LLC begins placing alternative investment purchases.
Starting a self-directed IRA LLC is easy and we will guide you through the entire account establishment process.
Step 1: Complete the sign-up form by clicking here.
Step 2: After we review your online application, we will e-mail you to confirm receipt of your IRA LLC request.
Step 3: After making payment, we will register the LLC with the secretary of state and obtain employer identification number for the LLC.
Step 4: We e-mail the self-directed IRA establishment forms and assist you in filling them out.
Step 5: We will assist you in filling out the IRA and/or qualified plan (e.g., former employer 401k, TSP, 403b or governmental plan) transfer-out forms.
Step 6: Mail the self-directed IRA establishment: Mail the self-directed IRA application to the new IRA custodian.
Step 7: Open the LLC bank account at your local bank.
Step 8: After the self-directed IRA has been funded, submit the IRA LLC Operating Agreement and investment forms to the new IRA custodian for funding.
Step 9: After the IRA LLC has been funded, begin placing investments by writing a check.
The LLC funding process generally takes 7 to 14 business days.
Yes former employer retirement funds and/or existing IRAs may be transferred/rolled over to a self-directed IRA and subsequently invested in the IRA LLC. We will guide you through the entire transfer process.
IMPORTANT: SIMPLE IRA funds may not be transferred to an IRA LLC until two years has passed since the SIMPLE IRA was first funded. This is a SIMPLE IRA rule. See publication 590 for more on this
The annual contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (same as 2019 limit). The annual contribution limit for 2015, 2016, 2017 and 2018 is $5,500, or $6,500 if you’re age 50 or older. Your Roth IRA contributions may also be limited based on your filing status and income. See IRA Contribution Limits.
No the IRA contribution limits do not apply to transfers/rollovers from other IRAs or former employer plans such as a 401k.
While you have always been able to make Roth IRA contributions past age 70 1/2, this was not always the case for traditional IRAs. However, thanks to the SECURE Act that was signed into law on December 20, 2019, you can now make regular contributions to a traditional IRA after age 70 1/2 as well as past age 72 provided you have earned income.
Yes, known as spousal IRA, you and your spouse can each make self-directed IRA contributions even if only one of you has earned income/taxable compensation.
QUESTION: Do I still need to have a self-directed IRA custodian for the IRA LLC even if the LLC will be self-administrated? If so, which custodian(s) do you work with most often?
ANSWER: Yes an IRA custodian is still required because they have to do the annual reporting with the IRS. For example, the IRA custodian has to issue a Form 5498 each year to report the total value of the IRA including the LLC. Many of our clients use IRA Services Trust Company because they have been in business since 1978 and their annual fee is 1$80 a year; however, you get to choose your IRA custodian.
QUESTION: In which state will this IRA LLC be registered?
ANSWER: The LLC is registered in the state that you live in
QUESTION: Does your fee cover the LLC state registration fee?
ANSWER: No our fee does not cover the LLC registration fee.
QUESTION: Does the IRA LLC need to file an annual report and pay annual registration fee in that state?
ANSWER: Yes the state may require an annual report and charge a fee. This depends on your state.
QUESTION: Your website says that a single member IRA LLC does not need to file tax return because it is considered disregarded entity. Do I need to include this LLC in my personal tax return?
ANSWER: No the IRA LLC activity is not reported on your personal tax return.
QUESTION: What if the LLC generate UBTI? Do I need to file a separate tax return for the IRA LLC in that case?
ANSWER: If the IRA LLC generates UBIT or UDFI, then yes a separate tax return known as form 990-T will need be filed with the IRS and the tax payment will need to be paid with IRA funds as this tax is assessed on the IRA.
How can we roll over my Roth IRA into a self employed IRA so we have more choices than stocks and bonds?
It is not possible to transfer a Roth IRA to a self-employed plan. But you can open a checkbook ROTH IRA that will allow for investing in alternative investments such as real estate. Click here to learn more.
Can you send me a list of your current custodial fees?
We do not act as the custodian. The vast majority of our customers are at a company called IRA Services Trust Company – please see the fee schedule located on their website. Of course, you can choose a different custodian if you prefer.
I have several retirement accounts to transfer/rollover do i need to wait for all of them to be transferred before opening the LLC?
You can rollover over at the same time or over a period of time.
Do i need to open the LLC within a certain time after establishing the IRA?
What IRS rule covers survivor-ship, i.e. when i die does it get dissolved or can my kids keep funding it?
It depends on who inherits the IRA. If the IRA is inherited by your spouse, it is treated as if it was your spouse’s IRA all along (e.g. your spouse could continue to make contributions to the account). If inherited by a nonspouse IRA, it is treated differently & the beneficiary needs to start taking distributions.
- The Investor is an “employee benefit plan” as defined in Section 3(3) of ERISA, which is subject to Part 4 of Title I of ERISA.
- The Investor is a “plan” as defined in Section 4975(e)(1) of the Internal Revenue Code, including, without limitation, individual retirement accounts and Keogh plans.
- The Investor is an entity whose underlying assets include “plan assets” (as defined under Section 3(42) of ERISA) by reason of a plan’s investment in the Investor. If true, the Investor hereby certifies that _____% of the total value of equity interests in the Investor is held by “benefit plan investors” as defined in ERISA
In this case neither of the options presented apply because it is the Roth owned LLC making the investment, not the Roth IRA.
LLC Tax Return QUESTION:
If my wife and I invest both or our respective IRAs in the same LLC will that trigger any LLC tax return filing requirement?
While both IRA accounts can invest in one LLC, this means that there will be two members of the LLC such that a partnership tax returns will have to be filed for the LLC (e.g. form 1065 with the IRS) as well as a K-1 for each IRA.
Additional Funding and Flow of Funds QUESTIONS:
If I need to add more funds, do I need to do that in a certain way? Let’s say I need another $10K to complete a property purchase.
Good questions. The funds cannot come from your own pocket. Reason being, the LLC is owned by your IRA and it would result in a prohibited transaction if you commingled your your personal funds with IRA funds.Instead, you can make an annual IRA contribution based on the IRA limits for the year, and/or transfer other IRAs or former employer retirement plans to the IRA.
The annual IRA contribution and/or transfers from other IRAs or former employer retirement plans have to first flow directly to the self-directed IRA because they must flow to an IRA in order to maintain there tax sheltered status. Once inside the self-directed IRA, they can be invested in the IRA LLC.
Rent Checks QUESTION:
If purchase real estate through the IRA LLC and collect rent, who will the check be made out to? My company name or the IRA custodian?
The main purpose of investing an IRA in a LLC is to invest in real estate through the LLC; therefore, not only will the LLC own the property, all the rent checks have to flow back to the LLC bank account. As such, the rent checks must be made payable in the name of the LLC.
Paying LLC Fee QUESTION:
I’ve been told by another firm that if you form an IRA LLC w personal funds (rather than have the IRA pay for formation) it can invalidate the IRA LLC? The IRS can say it wasn’t formed properly?
The key is to distinguish between expenses incurred before the LLC is owned by the IRA and those expenses incurred after the LLC is owned by the IRA. Expenses incurred before the LLC is owned by the IRA are paid with personal funds because the LLC is not owned by the IRA.
Withdrawing Funds QUESTION:
I believe that I read somewhere that if I plan to withdraw Assets from the IRA LLC that an Appraisal would need to be done at the end of the year preceding the withdrawal.
Would this apply if I do not plan to sell any Assets, but, instead only plan to withdraw earnings?
I have Rental Properties held in the IRA LLC, from which I may need to withdraw earnings to pay Medical Expenses next year.
Before you can take distributions, the funds must flow back to the IRA, as the distributions have to flow from the IRA. The IRA custodian will then ask you to fill out a distribution form and will subsequently disburse the funds. They will then issue a 1099-R to report the distributions by the following January for filing with your personal Form 1040 tax return.
You cannot process distributions from the IRA owned LLC directly to you as that will result in a prohibited transaction. Again, the funds must first flow back to the IRA custodian.
Roth IRA 5 Year Clock QUESTION:
Question related to the holding period (5) years on a new ROTH IRA. I currently have a ROTH IRA that is approximately 1 year old with TD-Ameritrade. Will I be establishing a brand new ROTH IRA that requires the full 5 year period or can I fund the self directed ROTH IRA with funds from my TD Ameritrade ROTH IRA? How will this impact the 5 year waiting period?
The 5 year holding period for the existing ROTH IRA will carry over and won’t start over provided it is processed as a direct rollover.
Bitcoin Coinbase QUESTION:
If I already have a Personal Coinbase account…could I link or add my new IRA LLC checking account & pay for cryptocurrencies this way or would I have to create a new account with Coinbase?
No you cannot commingle IRA LLC funds with your personal funds when investing in bitcoin. Therefore, a separate coinbase account will need to be linked to your IRA LLC bank account. If done through GDAX, the account will need to be titled in the name of IRA LLC and only IRA LLC funds can be used.
60 Day Rollover Distribution QUESTION:
I took a $16k IRA distribution a month ago but really only needed $14k can I put the excess $2k back into my IRA account?
If you did not process any other 60 day rollovers during that 12 month period from this IRA, or any other IRA then yes the rules allow you to rollover part or the full IRA distribution to the IRA as long as 60 days have not lapsed since you received the IRA distribution from the IRA custodian. You will need to first deposit the funds directly into the IRA not the LLC. You will need to contact the IRA custodian to get a copy of their 60 day rollover deposit form.
Could you please let me know if we have to file Form 1099-MISC for vendors who provided services to IRA LLC and were paid from the IRA LLC bank account.
While a solo 401k plan is required to issue a 1099-MISC, the same requirement does not apply to an IRA per the IRS on the “Instructions for Form 1099-MISC“.
Additional Funding for Existing Trust Deed QUESTION:
Good question and the answer is not because the trust deed is an asset of the IRA LLC; therefore, you cannot loan personal funds to the borrower. Instead, the IRA LLC would loan additional funds. Also, an IRA LLC is not allowed to obtain a loan solely for loaning funds to a third-party.
Additional Funding for Existing Trust Deed QUESTION:
Such transaction would result in a prohibited transaction.
Certain transactions between an IRA and its owner or an IRA and a “disqualified person” are specifically prohibited by law.
A prohibited transaction is a transaction between an IRA and a disqualified person that is prohibited by law.
The transaction that you are describing would run afoul with some or all of the following prohibited transaction rules:
Prohibited transactions generally include the following transactions:
- a transfer of IRA income or assets to, or use of them by or for the benefit of, a disqualified person;
- any act of a fiduciary by which IRA income or assets are used for his or her own interest;
- the receipt of consideration by a fiduciary for his or her own account from any party dealing with the IRA in a transaction that involves plan income or assets;
- the sale, exchange, or lease of property between an IRA and a disqualified person;
- lending money or extending credit between an IRA and a disqualified person; and
- furnishing goods, services, or facilities between an IRA and a disqualified person.
Help me Understand the Implications of the UBIT Tax QUESTION:
It may apply if you are doing a large volume of flips (because it may be viewed as a business) or if you purchase real estate using non-recourse financing (in which unrelated debt finance income tax would apply). See more at the following link: https://www.mysolo401k.net/
Non-Recourse Loan QUESTION:
A non-recourse loan/debt is a loan to an IRA LLC, which is only secured by the property that the non-recourse loan funds to the IRA LLC that were used to invest in the IRA LLC owned property. If the IRA LLC defaults in making the non-recourse loan payments, the borrowed can only go after the IRA LLC property that was purchased using the borrowed funds, and cannot go after any other IRA LLC funds.
Invest Traditional IRA & Roth IRA in Same LLC QUESTION:
While specific reporting will apply, yes it is possible for two IRA accounts to invest in a single LLC (including a single LLC Bank account). It is important to note that this means there will be two members of the LLC whic
See more at the following link:
No you cannot invest your IRA funds in a company for which you serve as the CFO.
Debt Financing for Real Estate Investment QUESTION:
Debt Financing Defined QUESTION:
IRA LLC Establishment Deadline QUESTION:
Unlike a self-directed solo 401k that has an establishment deadline of December 31, the IRA LLC can be funded with both rollover contributions (i.e. funds that are transferred from the existing account such as a former employer plan or an existing IRA) as well as contributions from your earned income. There is no deadline to fund an IRA with rollover contributions. The deadline to make contributions to an IRA from your earned income is your personal tax return deadline.
IRA LLC Pro-rata Rule QUESTION:
When an IRA contains both nondeductible and deductible funds, each dollar withdrawn will contain a percentage of tax-free and taxable funds. This percentage is based on the ratio of after-tax funds vs. the entire balance in all your IRAs. You cannot withdraw (or convert) just the nondeductible funds and pay no tax. Lastly, the distribution would need to be processed from the IRA not the IRA LLC, meaning the funds have to flow from the LLC bank account to the IRA custodian before you can take the distribution, as the IRA custodian will need to perform the 1099-R IRA distribution reporting. On a side note, The pro rata rule states you must include the balances of all IRAs, even if they are in separate accounts (including balances in SEP and SIMPLE plans).
Roth IRA LLC Distribution QUESTION:
- The taxpayer is age 59 ½ or older
- Upon the taxpayer’s death or disability
- For a first-time home purchase
You appear to meet the above requirements since you are past the 5 year holding period and over age 59 1/2.
Age 70 1/2 RMD QUESTION:
Spousal IRA LLC Contribution QUESTION:
Invest 2 (two) IRA LLCs in Same Property QUESTION:
Contributions Based on Alimony Payments QUESTION:
Contribute to SEP IRA & IRA in Same Year QUESTION:
Custodian of the Self-Directed IRA QUESTION:
Setup & Ongoing Fees QUESTION:
SEP IRA LLC Contribution Past Age 70 1/2 QUESTION:
Yes, just like the solo 401k rules allow for contributions past age 70 1/2, the same is true for the SEP IRA IRAs. Therefore, the business owner can continue to make SEP IRA contributions past age 70 1/2.
Can a Minor Open an IRA QUESTION:
Yes, as long as she has earned income. Child actors, models, minors who do office work, etc., may have the earned income that makes them eligible to contribute to a traditional IRA or Roth IRA.
The challenging aspect of a minor owning an IRA is the contractual nature of an IRA. To open an IRA, an individual must execute a plan agreement, which is the legal contract between the IRA owner and the financial organization. State laws generally restrict minors from entering into contracts. To overcome this challenge,
When opening the child’s IRA, most states require a parent or guardian to co-sign the IRA application which the IRA custodian can confirm if this requirement applies in your child’s state of residence. The parent or guardian then makes decisions about the IRA until the minor reaches the age of majority, which varies from state to state. Lastly, the child’s IRA can then be invested in an LLC for investing in alternative investments such as real estate and promissory notes, etc. Of course, you may want to wait until the child’s IRA has enough funds to invest in an LLC if the plan is to use it for investing in real estate.
Multiple 60 Day Rollovers QUESTION:
No. The IRA account holder is limited to one IRA distribution eligible for rollover per 12-month period, regardless of the number of IRAs (Traditional, Roth, and SIMPLE IRAs) that the IRA owner may have. However, check with your employer because if you have a 401k plan you may be in luck, meaning you could rollover the second IRA distribution to a 401k plan including a solo 401k plan if you are self-employed as long as the 60-day window has not expired. Reason being, the one-per-12-month rule does not apply to retirement plans such as 401k, 403b, 401a, 403a, TSP and 457b. Note, however , that only pre-tax IRA funds, not Roth IRA or non-deductible IRA funds can be transferred to a 401k plan or the plans mentioned above.
Start of the IRA 60-Day Clock Start for Rollovers QUESTION:
The 12-month period starts when you take construction receipt of the IRA funds, so it starts on the day the IRA holder receive the distribution. As an illustration, if you receive the IRA check in mail on September 16, 2018, the funds must be deposited to the same IRA or another IRA by November 16, 2018. Therefore, you won’t be eligible for another IRA rollover until September 16, 2019.
Chop up My IRA Rollover QUESTION:
The IRA rules do not require the IRA account holder to deposit the full distribution amount in one lump to the same or different IRA. The IRA rules permit the IRA account holder to complete one IRA rollover during a 12 month period but may complete a rollover through multiple rollover contributions made to the same or a different IRA.
SBA Loan for IRA LLC QUESTION:
Mother’s Trust Prohibited Transaction QUESTION:
Tax Return for Single Member IRA LLC QUESTION:
- In that case, the LLC is a disregarded entity at the federal level so no filing needs to be filed with the IRS provided that the IRA LLC has not invested in an investment that triggers unrelated business income tax (equity investments in a business that is not taxed as a c-corporation) or unrelated debt finance income tax (debt-financed investments).
- Please check with your local advisor regarding any filings that may need to be done at the state and/or local level (e.g. such as filing the annual report for the LLC with the Secretary of State, franchise tax and/or property tax (as applicable), state income tax return).
- The self-directed IRA custodian will also file a Form 5498 for the IRA to report the total fair market value of the IRA including the value of the LLC. The self-directed IRA custodian will generally reach out to you as the manager of the IRA in January or February of each year to gather the value of the LLC for use in their Form 5498 reporting.
Non-Spouse Beneficiary Distribution QUESTION:
- Yes the SECURE Act changed the distribution rules for IRAs inherited by non-spouse beneficiaries starting in 2020. Other than those non-spouse beneficiaries who are disabled or chronically ill, most beneficiaries will be required to empty out the inherited IRA within 10 years (known as the 10 year rule).
- This means the inherited IRA will need to be fully distributed by December 31st of the tenth year following the IRA owner’s year of death.
- The non-spouse beneficiary is not required to take distributions over the 10 year period and can wait until the end of the tenth year to take the full required distribution.
- If the beneficiary is a minor, they will be able to wait until they reach the age of majority under state law or finish school (non later than age 26) before the 10 year rule commences.
- However, the 10 year rule will still apply to grandchildren unless they are disabled or chronically ill.
- The 10 year rule also applies to Roth IRAs.
- A 50% tax penalty applies to those non-spouse beneficiaries who do not fully distribute the inherited IRA by the end of the 10 year period.
- Spouse beneficiaries are not subject to this new 10 year rule, and can distribute the IRA over their life time.
COVID-19 Impact on 72T Substantially Equal Payments QUESTION:
CARES Act / COVID-19 QUESTION:
- The deadline for making 2019 IRA contributions has been extended to July 15, 2020. Noe that IRA contribution first must flow to the IRA before it can be invested into the IRA LLC. This is always the case regardless of the extension to make the IRA contribution.
- Required minimum distributions (RMDs) for IRAs including SEP IRAs and SIMPLE IRAs have been waived for 2020. Generally the RMD has to flow from the IRA LLC to the IRA and then to the IRA owner.
- For those under age 59 1/2 who take an early distribution from their IRA in 2020, The 10% early withdrawal penalty will be waived on aggregate distributions of up to $100,000 if the distribution falls under COVID-19 related distribution (CRD).
- Also, the federal tax due on IRA distributions up to $100,000 can be paid over 3 years or can repay distribution to the IRA within 3 years. Visit here for more information on the CARES Act.
CARES Act / COVID-19 Husband & Wife IRAs QUESTION:
Already Took my 2020 RMD QUESTION:
it is within 60 days of the date of receipt of the required minimum distribution, or,
if the 60th day falls anywhere between April 1, 2020, and July 15, 2020, the distribution is rolled over by July 15, 2020.
Important Note: If you took multiple IRA distributions including required minimum distributions from your IRA, the one-per-12-month rollover rule still applies. IRA owners who have taken multiple distributions will be limited to rolling over only one of the distributions, provided that they have not rolled over a distribution in the preceding 12 months. For those IRA owners in this category, you may want to consider opening a solo 401k plan and rolling the IRA distribution to it, since the one-per-12-month rollover rule does not apply if the funds are rolled over to a qualified plan including a solo 401k plan.