Rolling over another IRA into an established SDIRA and LLC

19 Replies

Is it possible to roll another personal IRA into an already established SDIRA and then into the LLC already established under this SDIRA. I already have two properties in the LLC and would like to move the money from my other IRA into my LLC. I understand everything must go through my Custodian. The reason I ask is I have found several companies that say it can be done and others that say it is a prohibited transaction.

Dave Stratton

Dmitriy

Thank you for the quick response.The IRA is the only member of the LLC. I set it up with Guidant and the custodian is IRA Services. When I set it up, I had two consultations with an attorney that is very familiar with SDIRA's and he said I could add money. I specifically ask this question because I definitely wanted to add more money in the future. The reason I am asking is when I was dealing with a company that is preparing my 990t. I asked about this and they said it is not allowed because the IRA would be a disqualified person. So I went online and found people saying conflicting things If I can do this, can I also add the annual IRA contribution?

Dave

David,

I am in a three way LLC with my brother and father, all using our individual SDIRAs (two traditional, one ROTH). We are each 33.33% owners and hold one property. We ARE looking for more properties and I too specifically asked ahead of time if we could add more IRA funds in the future.

In our case, being a '3 way LLC', we CAN from everything we have been told, but we MUST keep each of our contributions into the LLC in the exact same proportions of 33.33% each. I am not sure if this is always true, or if it is because we are 'disqualified parties' and that is why it must stay that way. I think it is the latter of the two. We CAN each roll however much we want into each of our individual SDIRAs, but the amount we 'transfer' over to the LLC must remain in that ratio.

An example for anyone in a multi member LLC is that in our case of 33.33% ownership each is that within THAT particular LLC we must keep the same 'ratio', but say if any of us wanted to buy a property on our own, we could use the same SDIRA to do that OUTSIDE of the 3 way LLC.

Hope that helps. If there is one thing I have learned out there is that there is a LOT of mis-information even from the 'experts' on occasion. See my earlier posting for info on who we use and are very happy with if interested.

Dan Dietz

608-524-4899

Some people are more conservative than

Some people are more conservative than others but I would look to section 4975 of the IRC for each and every transaction involving the IRA. Once you become a majority owner, the entity is technically disqualified according to the code. Therefore, any subsequent fundings would be prohibited.

@Dmitriy Fomichenko What conditions in the operating agreement would make this acceptable?

If it's a single member LLC owned by your IRA, you should be able to transfer additional IRA funds to your SD IRA and then add additional funds to that LLC. If it's family -controlled (LLC is owned by your IRA, yourself, disqualified parties), you cannot.

I just heard back from my Custodian's compliance department. They said I will be able to add funds, so I guess it is a matter of interpretation on section 4975. I spoke with 2 other companies and they also said I would be able to add funds as a single member LLC.

Originally posted by @Loren Whitney:

Some people are more conservative than others but I would look to section 4975 of the IRC for each and every transaction involving the IRA. Once you become a majority owner, the entity is technically disqualified according to the code. Therefore, any subsequent fundings would be prohibited.

Dmitriy Fomichenko What conditions in the operating agreement would make this acceptable?

In a single-member LLC the IRA owns 100% of the LLC units, therefore it is a majority owner at all times. However, if there are no other members and the LLC's Operating Agreement does not specifically disallow purchase of additional LLC units, more funds can be funneled to the LLC from an IRA at any time.

Disclaimer: I'm not an attorney, please consult with legal counsel about specifics of your situation. 

Dmitriy Fomichenko, Broker
(949) 228-9393

@David Stratton  

from your profile I see that you are a real estate agent, which means you are independent contractor. That qualifies you for a self-directed Solo 401k. This powerful investment vehicle also offers checkbook control just like IRA owned LLC, but without use and expense of a custodian and LLC. It also has some powerful features that are not available with SDIRA, which I discuss in one of my latest BP Blog post HERE (in case you wish to learn more).

Dmitriy Fomichenko, Broker
(949) 228-9393

Hmmmm

Doreen Chaisson Can you provide any clarification on the 'why' it's within the rules?

I've never heard of a letter ruling on additional fundings once you become the manager of the entity.

I'm curious to know if this is concrete or just logic. It would make logical sense that additional fundings would be okay for investment purposes only but the code clearly states otherwise. I look forward to getting to the bottom of this either way.

@David Stratton Be aware that just because your custodians compliance department approves something doesn't mean you have sometime to fall back on in the event of an audit. You at want to consider seeking the blessing of an experienced attorney.

Not an attorney or CPA here, but I spoke to quite a few while doing some research for a book. Most of the practitioners, in the "industry", I spoke to believe that purchasing additional shares of a single member LLC is OK by way of exemption under 4975(d)(9) and because there is no self-dealing of any sort taking place.

Tax code aside and purely speculation on my point and certainly wouldn't be a defense if you were in a jam with the IRS... The IRS has seemed to be pretty mum on this type of a transaction since Swanson was decided in 1996, I would think that if they saw this is as an abusive practice, we would have heard some anecdotes about negative audit results, something in a field manual, etc. When the IRS got wind of ROBS arrangements, a much less used arrangement, there were all over it, because they viewed it as a potentially abusive tax shelter. They did a study, issued guidelines for proper implementation along with stern warnings.

In many cases, especially where the IRA LLC is used as a holding company for real estate and other investments that could just be split amongst multiple IRA LLCs and is not truly an operating business, forming new LLCs would be the solution around the code -- inconvenient, costly, and possibly resulting in lots of additional 990Ts to process, but it wouldn't change the investments being made or made the underlying investment transactions executed any more of a prohibited transaction.

There are still some attorneys who don't believe that the concept of an IRA LLC is kosher, despite Swanson.

Just my humble opinion.

As @Phil G. mentioned, there is no transaction between the IRA and the IRA owner, or any disqualified party, so there is no self-dealing. As with many IRS rules are, the rules pertaining to IRA investments are "exclusionary" - meaning, they tell you what you CAN'T do, and by omission, everything else is allowed.

Remember, as the IRA owner, you are the NON-member manager of the single member LLC. You are having no transaction with that LLC, your IRA is. As long as your operating agreement doesn't prohibit additional infusions of capital, your IRA can continue to add additional capital to its LLC.

Additionally, many custodians require single member LLC's to appoint a "special advisor" to review all of the LLC's transactions and be on the look out for prohibited transactions or abusive activities.

We've custodied thousands of IRAs with single member LLCs who have done additional funding and have yet to hear of a case in which this was deemed prohibited or abusive.

If you really want concrete approval, you can write to the IRS or Department Labor, pay the high fee, and ask them to issue you a Private Letter Ruling on the subject.

Dmitriy, I wish I could do the solo 401k, but I am only a part time agent. I have a full time job which I love, so I only do real estate part time. I use it for my own investments and help out a few other investors. I know it is a much better vehicle with so many more advantages.

Loren I appreciate the warning, when I setup my SDIRA I had two consultations with an Attorney which is very familiar with SDIRA. He said it is allowed as long as it is done correctly. I also spoke with two other Custodians and they said the same thing. I am sure they all have attorney's looking at everything. I have not done anything yet, but I would like the option. I think it looks like a gray area with many Attorney's having different opinions about the interpretation.

Dave

@David Stratton  

you don't have to have full time self-employment activity. Being part time real estate agent in addition to having your full time job qualifies you for the Solo 401k. Your salary deferral contributions will be subject to the same limit, but your Solo 401k plan also offers profit sharing, which is 20% of your earnings.

So if you wish to have Solo 401k - you can! 

Dmitriy Fomichenko, Broker
(949) 228-9393

I see things differently when it comes to transactions taking between the IRA and disqualified persons/entities.

From my reading of the code,

4975(e)(2)(A) says I am a disqualified person as a fiduciary of the account.

4975(e)(2)(G) Says that any entity I directly or indirectly own 50% or more of is a disqualified entity.

Since I indirectly own the LLC via my IRA it is a disqualified entity. AND

4975(c)(1)(A) Says that prohibited transactions include

(A) sale or exchange, or leasing, of any property between a plan (THE IRA) and a disqualified person (THE LLC);

Since my IRA owned LLC is a disqualified entity, how can my IRA have a transaction with the LLC?

Loren, I am not a CPA or an Attorney, but with that logic how can the IRA ever do the initial funding of the LLC?

David-

The ruling in Swanson v. Commissioner basically said that an entity that has yet to sell any interest is not disqualified -- which would therefore allow for initial capitalization. Not to speak for Loren, but I believe his explanation picks up after the initial funding where you're into that disputed area of interpretation of the code.

That's correct. The initial funding and subsequent fundings are two different scenarios. Thanks Phil

@David Stratton I also used Guidant to set up my SDIRA and have funded it a couple of times by transferring funds from another IRA into the SDIRA. You are correct that since the LLC is solely owned by the SDIRA there is not a disqualified person involved and all of the funds are owned by, invested by the SDIRA and the returns go back to the SDIRA so there is no disqualified transaction. I have found using the checkbook SDIRA Guidant set up to be very easy to use and as long as you follow the rules (not difficult) you can get great returns on investment that are free from the stock market gyrations. Good luck with it.

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