The Legal And Financial Issues Surrounding Llcs And Self-directed Iras
The LLC is an ideal way to gain more control over your self-directed IRA. It gives you full control over your checking account. What you have to watch out for is what can potentially happen if the IRS audits you. LLCs are not addressed in law, so its very much down to the discretion of the IRS.
Some investors will discourage the use of the LLC for this reason. We believe its best to simply stick to the rules and avoid bumping up close to potential offenses. Here are some of the main issues you might come up against with your self-directed IRA.
Prohibited Transactions
Like with any part of your IRA, the prohibited transaction is the biggest threat. If you make the wrong transaction youre going to suffer financial penalties. Sometimes, this can be up to 10 per cent of your total account value. This is a huge amount of money and it can ruin all your well-laid plans.
Talk to your IRA custodian about prohibited transactions. The main thing you need to watch out for is dealing directly with your IRA. Everything your IRA owns is owned by the IRA. Its not in your name, in other words. In short, pay the transaction fees and use your custodian for any financial transactions.
Avoiding Securities and Collectibles
Your IRA isnt eligible for income tax. On the other hand, it also cant guarantee anything. One of the main problems youll come up against is the pressure to take out a credit card for your new company. Credit card providers automatically target newly established companies. Legally, your IRA cant hold a credit card or take out any lines of credit.
This would lead to legal action because by taking on debt via a credit card youre guaranteeing youre going to pay the money back. Even the act of applying for a credit card is technically breaking the rules because the success of your application relies on a credit history, which your IRA cant have since it doesnt guarantee anything.
Collectibles arent eligible for IRAs. You should make sure your new company has nothing to do with them. Things like antiques, alcohols, and artwork would count as a collectible.
The main consequence of these things happening is tax liability. Your IRA will discharge everything inside it to you. This might not sound like a problem, but everything will be classified as personal income, and therefore liable to income tax.
Unrelated Business Taxable Income (UBTI)
UBTI is a type of tax which can be created if you perform certain actions within your IRA and LLC. If you need to perform an action which would generate this, do it through a solo 401(k) plan. These wont trigger UBTI despite performing exactly the same action.
If you fall victim to UBTI youre going to get taxed twice on the same income. The IRA would pay the tax immediately on the action, and youll have to pay tax when you eventually take the money out of your IRA. The only tax you should pay is on personal income after disbursing your money.
Some investors will discourage the use of the LLC for this reason. We believe its best to simply stick to the rules and avoid bumping up close to potential offenses. Here are some of the main issues you might come up against with your self-directed IRA.
Prohibited Transactions
Like with any part of your IRA, the prohibited transaction is the biggest threat. If you make the wrong transaction youre going to suffer financial penalties. Sometimes, this can be up to 10 per cent of your total account value. This is a huge amount of money and it can ruin all your well-laid plans.
Talk to your IRA custodian about prohibited transactions. The main thing you need to watch out for is dealing directly with your IRA. Everything your IRA owns is owned by the IRA. Its not in your name, in other words. In short, pay the transaction fees and use your custodian for any financial transactions.
Avoiding Securities and Collectibles
Your IRA isnt eligible for income tax. On the other hand, it also cant guarantee anything. One of the main problems youll come up against is the pressure to take out a credit card for your new company. Credit card providers automatically target newly established companies. Legally, your IRA cant hold a credit card or take out any lines of credit.
This would lead to legal action because by taking on debt via a credit card youre guaranteeing youre going to pay the money back. Even the act of applying for a credit card is technically breaking the rules because the success of your application relies on a credit history, which your IRA cant have since it doesnt guarantee anything.
Collectibles arent eligible for IRAs. You should make sure your new company has nothing to do with them. Things like antiques, alcohols, and artwork would count as a collectible.
The main consequence of these things happening is tax liability. Your IRA will discharge everything inside it to you. This might not sound like a problem, but everything will be classified as personal income, and therefore liable to income tax.
Unrelated Business Taxable Income (UBTI)
UBTI is a type of tax which can be created if you perform certain actions within your IRA and LLC. If you need to perform an action which would generate this, do it through a solo 401(k) plan. These wont trigger UBTI despite performing exactly the same action.
If you fall victim to UBTI youre going to get taxed twice on the same income. The IRA would pay the tax immediately on the action, and youll have to pay tax when you eventually take the money out of your IRA. The only tax you should pay is on personal income after disbursing your money.