Developer · New York, NY · Member since 2016 · 50 posts · 7 votes
If I have an existing LLC, am I able to switch the owner to be a self-directed IRA? What factors need to be taken into account for a situation like this?
you can not sell (or otherwise transfer) your ownership in the LLC (or any other asset or property) to your IRA. Such transaction would be considered prohibited by the IRS. You as disqualified person are not allowed to engage in any transaction with your IRA.
you can not sell (or otherwise transfer) your ownership in the LLC (or any other asset or property) to your IRA. Such transaction would be considered prohibited by the IRS. You as disqualified person are not allowed to engage in any transaction with your IRA.
If I have an existing LLC, am I able to switch the owner to be a self-directed IRA? What factors need to be taken into account for a situation like this?
@Dmitriy Fomichenko is correct. You cannot do that as it would be considered a prohibited transaction.
Thanks for that information. The only way for me to do this would be to create a brand new LLC with the IRA as original owner, correct? If a new LLC is created with an IRA as owner, would that LLC still be eligible to be listed as the beneficiary to a trust?
Also - would a self-directed IRA be considered a form of asset protection when purchasing real estate?
I've researched and found that self-directed IRAs are subject to an unrelated business income tax. Do you have any information on how to limit the amount that can be taxed?
The only way to do what? What exactly are you trying to accomplish?
IRA owned LLC is used as a vehicle to provide the account holder with checkbook control over his or her IRA. If that is what you want to do then yes, it has to be brand new special purpose, single member LLC. It must be setup in a certain way to be IRS compliant (not a DIY project).
Self-directed IRA in itself is not a form of asset protection, it is a retirement savings vehicle allowing your to invest in alternative assets.
If there is unrelated business income in an IRA - it would be subject to UBIT. All income from passive investments will be completely sheltered from any taxes.
@Dmitriy Fomichenko has solid info. Reference "Swanson vs the IRS commissioner " for more info on checkbook LLC Ira.
It is easy to determine UBTI. Lay out the scenario and get irs form 990t and fill It out. Or get your accountant to do it. Don’t worry because most cases don’t pay much if any. Most people make a bigger deal of UBIT than required. You will see what affects taxes and how to minimize if required.
@Roberto Westerband the cheapest option is to establish an IRA owned Business Trust since the Business Trust avoids all of the on-going and compliance fees associated with an LLC. Since the Trust is owned by the IRA, it provides the same asset protection as your IRA account generally (lawsuits against you won't affect the IRA).
If you think the UBIT will be high, then you will need to put in place what is called a "domestic blocker". These aren't cheap though, so you will want to know the projected taxes before considering your legal options to avoid them
@Dmitriy Fomichenko yes the purpose of my question was to see how I could create an IRA owned LLC for checkbook control given that I already have an LLC. Thanks for providing the information - it's good to know passive investments will be sheltered from taxes.
@Scott Smith very helpful with the advice to establish an IRA owned trust. Would passive (i.e. rental) income still be sheltered from taxes if the trust owns a rental property?
If the income is derived from the passive investment such as rental property in an IRA or any entity it owns - it will be sheltered from taxes. If on the other hand income is from an active trade or business (such as property flipping business, owning a franchise, etc.) - UBIT will apply. In other words there is no difference is the investment is owned directly by the IRA or through an entity, you have to look at the investment.
I've researched and found that self-directed IRAs are subject to an unrelated business income tax. Do you have any information on how to limit the amount that can be taxed?
Yes, UBTI is taxed at trust rates. There are certain items that are exempt such as dividends interest, capital gains rents(unless there is debt financing involved). It is a very complicated topic. Feel free to reach out to me via PM if you have a specific question.