Self directed IRA and unqualified persons

10 Replies

Does anyone know a way that it is possible to use a self directed IRA to invest in an LLC that I own as well? According to the IRS rules, i would be considered an unqualified person since I own both.

James: If this is an existing LLC and you are already an owner there is no way to have your IRA invest in that LLC. As you state, the IRS considers you a disqualified person and this would create a prohibited transaction. Something you want to avoid at all costs.

Perhaps if you tell me what your goals are, or what you want to accomplish, I can assist.

Jaime Raskulinecz

If you already own 50% or more of the LLC, then further investment by your IRA is prohibited. If you were starting a new LLC from scratch, both your IRA and your personal funds could be involved, but there are limitations on your role. For example, you can be the decision maker and handle the checkbook, but you would not be able to draw a salary or be involved with any of that LLC's assets. For example, if that LLC purchased rental properties, you could not do any work on those properties.

Also, because this would still be considered a single member LLC, most IRA custodians will require that you appoint a special advisor (attorney or CPA) to review every transaction of the LLC to ensure no prohibited transactions are taking place.

Originally posted by @James Talbert :

Does anyone know a way that it is possible to use a self directed IRA to invest in an LLC that I own as well? According to the IRS rules, i would be considered an unqualified person since I own both.

James, just as others have stated above, it would be illegal for your IRA to invest in an LLC that you already own.

Dmitriy Fomichenko, Broker
(949) 228-9393

thank you both....

Jamie, I just left my job to purchase a business. I plan to roll my 401k Into an IRA and liquidate 75% of it to purchase and operate the new business. My goal is to try and avoid the 10% early withdraw fee.

Originally posted by @James Talbert :

thank you both....

Jamie, I just left my job to purchase a business. I plan to roll my 401k Into an IRA and liquidate 75% of it to purchase and operate the new business. My goal is to try and avoid the 10% early withdraw fee.

James, if you take early distribution from your IRA - you will be taxed and penalized.

Another option to consider is a Solo 401k. It has a 'participant loan' feature allowing you to borrow up to $50K from your account tax-free and penalty-free. However, Solo 401k is designed for owner-only businesses, therefore if your business will have full time employees (part time under 1,000 hours per year is OK) - this option will not work.

Dmitriy Fomichenko, Broker
(949) 228-9393

Again, this is a very tricky area. If you plan to invest the IRA funds directly into the company, what you are talking about is a Rollover Business Start Up. Generally an IRA investment has to be an arm's length transaction for the benefit of the IRA and not for personal benefit of the IRA owner.  Many IRA custodians, including the one I work for, will not accept these type of investment structures if you are planning to work for the company and draw a salary.

You can transfer your retirement funds to a Rollover as Business Startup (ROBS 401k/PSP) in fund a real-estate operating company. This will allow you to both grow your retirement funds as well as take a salary because you will be an employee of the business.  Further, because the ROBS invest in the business, it is not deemed a distribution and not subject to the 10% early distribution penalty. 

@James Talbert

It definitely looks as if the Rollover as Business Startup plan is the correct vehicle for your goals.

Your operating business would need to change from a LLC to a C Corp. The C Corp sponsors a new 401k or Profit Sharing plan that you can roll your existing IRA or 401k into. That new 401k/PSP will then purchase shares of the parent corporation, and as a result the retirement plan capital is now available as shareholder capital to the company. You will be a employee (and likely personally shareholder as well) and can work for the company and receive a salary without violating IRS rules.

This structure has been around for almost 30 years, and can be a powerful means to start or grow your own business.

James ROBS is certainly a strategy to do what you're trying to accomplish. However, I would caution you that the IRS has some issues with these types of arrangements. I wrote an article on the topic after reading an internal IRS memo to their agents talking about this. I can send it to you if you email me directly at [email protected]

There are some companies out there that specialize in setting these up, but some of them don't actually stay around to advise the business owner on the steps necessary to ensure staying within the IRS guidelines for these.

I always suggest, if there is enough money involved, that a client interested in using this strategy consult and hire an attorney who is expert in these matters to set it up and advise on an ongoing basis. This comes with a higher price tag, of course. But, in my opinion, this is well worth it if it ensures it is being done correctly and there are no issues with the IRS later.

Best,

Jaime

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