Self-Directed IRA LLC Prohibited Transactions

Certain investments placed through an IRA LLC can be deemed prohibited. This includes investing the IRA LLC in the following:

  • life insurance [see (IRC Secs. 408(a)(3) and 408(e)(5)(b]; and
  • certain collectibles [ See (IRC Sec. 408(m)]

NOTE 1: If IRA LLC assets are invested in life insurance, only the funds used to for the investment are considered distributed and taxable, not the entire IRA LLC.

NOTE 2:  Collectibles generally include any artwork, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, or any other tangible personal property as defined by the U.S. Treasury Secretary.

A prohibited transaction can also result if the IRA LLC assets are pledged as security for loans, and if the IRA participant takes loans from the IRA LLC.

A prohibited transaction can also result if the IRA LLC investments are used in a self-serving manner by the participant or a disqualified party such as the IRA LLC participant’s spouse, children, parents, trust or business for example. These rules have been promulgated to ensure that the assets of the IRA LLC are invested in a manner that benefits the IRA LLC itself (i.e., not the IRA participant).

More information regarding the IRA LLC prohibited transactions can be found in IRC Secs. 408(e), 408(m) and 4975, and their associated Treasury regulations. IRS Publication 590, Individual Retirement Arrangements (IRAs), also includes some general discussion on IRA LLC prohibited transactions.

Following are some examples of prohibited transactions with IRA LLC funds.

  • The IRA LLC participant or other disqualified party borrowing money from the IRA LLC
  • IRA owner (or disqualified persons) selling property to the IRA LLC
  • Receiving compensation for managing the IRA LLC
  • Using the IRA as security for a loan ((IRC Sec.408(e)(3) and (4))
  • IRA LLC participant buying real estate for personal use with IRA assets
  • As described above, investing the IRA LLC in life insurance or collectibles

Note 1: While a solo 401k plan allows for participant loans, the same is not true for an IRA LLC. If an IRA LLC participant takes a loan from his or her IRA  LLC, the IRA ceases to be an IRA on the first day of the tax year that the loan occurred. The fair market value as of that date is treated as distributed and subject to applicable taxes.

Invest in Son’s Private Equity Deal QUESTION

With a self directed IRA, could I invest in a private equity deal that my son is putting together if we together would own less than 50%?

While it is not prohibited to invest your self-directed IRA  or IRA LLC in the same private equity deal as your son, provided the aggregate investment ownership is less than 50%, such investment is not allowed if your son is the officer, director or manager of the fund.