Traditional IRA LLC vs Roth IRA LLC

While Traditional IRA assets are in the trillions (around $7.5 trillion by the end of 2017), and Roth IRAs were worth $810 billion as of the end of 2017 (see: https://www.ici.org/research/stats/retirement), both IRA types are popular for investing in single member LLCs whereby the IRA is the sole member for the purpose of passively investing in alternative investments such as real estate, promissory notes, and tax liens, to name a few.

The differences between Roth IRA LLCs and the Traditional IRA LLCs for the most part fall at the contribution and distribution levels.

For example, in order to contribute to a Roth IRA the individual’s modified adjusted income (MAGI) must be below a certain limit. The ability to contribute to a Roth IRA starts to phase out at $189,000 in 2018 and $193,000 in 2019, if you are married and file a joint return. If you are a single filer, the phase-out begins at $120,000 in 2018 and $122,000 in 2019).

On the other hand, MAGI does not apply to Traditional IRA contributions, but contributions cannot be made once the Traditional IRA owner turns 70 1/2.

Traditional and Roth IRAs are both types of tax-advantaged accounts designed to help people save for retirement. For 2018, eligible taxpayers can contribute up to $5,500 (or up to the level of earned income, if lower) to a traditional IRA, or $6,500 if they have reached age 50. The limit for 2019 contributions is $6,000—or $7,000 for people over age 50.

From a distribution perspective, all distributions from Traditional IRAs are taxable.

Roth IRA distributions are generally not taxable provided certain distribution rules are satisfied. Roth IRA assets must be distributed in the following order: regular contributions, conversion and retirement plan rollover assets, and earnings.

If the Roth IRA distribution is considered “qualified,” meaning the IRA owner satisfies on of the following conditions, neither taxes nor the 10% early distribution penalty applies.  This is probably the biggest advantage of a Roth IRA. For distributions to be qualified, a five-year period must be met and the Roth IRA owner must be age 59½ or older, a first-time homebuyer, disabled, or deceased. If not qualified, the distributions may be subject to income tax and the 10 percent early distribution penalty tax.

 

Traditional IRARoth IRA
Age 70 ½ age limit for contributionsNo age limit for contributions
No MAGI restrictions for contributionsMAGI restrictions for contributions
Tax-deductible contributions*Contributions are not tax deductible
Taxable distributionsTax-free distributions*
RMDs apply starting at age 70 1/2RMDs do not apply

*If eligible

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