IRA LLC (IRA/LLC): The Complete Guide to Checkbook Control IRAs
IRA/LLCs have become popular amongst real estate investors and other investors who regularly invest in alternative assets with their retirement account. When an IRA owns real estate directly, the income and payments as well as contracts and documents flow through the IRA custodian. Many IRA owners do not like the back and forth of instructions and authorizations for expenses or contracts with their custodian on the property and instead choose to use the IRA/LLC structure whereby their IRA owns the LLC and the LLC in turn owns the real estate and operates the investments. In this instance, the IRA owner can serve as manager of the LLC. As manager of the LLC, the IRA owner can have signing authority for the LLC for contracts and can use an LLC business checking account.
For investors who regularly acquire real estate, make private loans, or engage in transactions that require ongoing management, an IRA/LLC can provide significant administrative convenience while maintaining the tax advantages of a self-directed IRA.
This article explains how an IRA/LLC works, how to properly establish one, the legal authority supporting the structure, and the common mistakes investors should avoid.
What Is an IRA LLC?
An IRA/LLC is an investment structure whereby an IRA invests capital into a newly created limited liability company (“LLC”). The IRA owns the LLC units just like your IRA can own Coca-Cola corporation stock.
A common IRA/LLC structure is one where the IRA invests a designated amount of cash into the LLC in exchange for 100% of the membership units of the LLC. The LLC then in turn acquires the intended investment asset. For example, a rental property.
An IRA/LLC can also be formed with numerous IRAs owning the LLC, with ownership allocated between the different IRAs based on the dollars invested.
Although commonly referred to as a “checkbook control IRA,” the retirement account itself remains the IRA. The LLC is simply an investment owned by the IRA.
This distinction is important because the IRA owner does not own the LLC personally. The IRA owns the LLC.
How an IRA LLC Works
The structure is relatively straightforward.
Step 1
The investor establishes and funds a self-directed IRA.
Step 2
The self-directed IRA invests cash into a newly formed LLC.
Step 3
The IRA receives membership units in the LLC in exchange for its investment.
Step 4
The LLC opens its own business checking account.
Step 5
The LLC acquires and manages investment assets.
In many cases, the IRA owner serves as manager of the LLC. As manager, the IRA owner can sign contracts on behalf of the LLC and manage the LLC’s bank account.
The investment assets are owned by the LLC, and the LLC is owned by the IRA.
For example, an investor may transfer $150,000 from an existing IRA into a self-directed IRA. The self-directed IRA then invests the $150,000 into a newly formed LLC in exchange for 100% of the LLC membership interests. The LLC opens a business checking account and uses those funds to acquire a rental property. The rental income is deposited into the LLC bank account and expenses are paid from that same account. The IRA continues to own the LLC, and the LLC continues to own the property.
IRA LLC Structure
| Party | Ownership/Role |
|---|---|
| IRA Owner | Manager of LLC |
| Self-Directed IRA | Owner of LLC |
| LLC | Owner of Investment Assets |
| Investment Assets | Real estate, notes, private companies, private funds, and other alternative assets |
Why Investors Use an IRA LLC
There are two primary reasons investors use an IRA/LLC structure.
Administrative Convenience
The most common reason investors establish an IRA/LLC is administrative convenience.
When an IRA owns assets directly, transactions generally require direction through the IRA custodian. With an IRA/LLC, the LLC maintains its own bank account and can transact directly through that account.
This can be particularly useful for:
Rental real estate
Fix-and-flip projects
Private lending
Tax liens
Investments requiring frequent transactions
Investments requiring earnest money deposits or recurring expenses
The benefit is not that the IRA rules change. The prohibited transaction rules still apply. The benefit is that the LLC can execute transactions directly through its own bank account.
Asset Protection
Another benefit of the IRA/LLC structure is the additional liability protection provided by the LLC.
For example, if an IRA owns a rental property directly, the property is held in the IRA.
If the IRA instead owns an LLC and the LLC owns the property, the LLC may provide an additional layer of liability protection for the investment.
Investors should consult legal counsel regarding asset protection considerations under their state’s laws.
Direct IRA Ownership vs. IRA LLC
| Feature | IRA Owns Asset Directly | IRA/LLC Owns Asset |
|---|---|---|
| Signs Contracts | Custodian | LLC Manager |
| Writes Checks | Custodian | LLC Manager |
| Bank Account Control | Custodian | LLC |
| Asset Ownership | IRA | LLC |
| Additional Liability Layer | No | LLC Structure |
Investments That Work Well in an IRA LLC
An IRA/LLC is not necessary for every self-directed IRA investment.
Many passive investments can be held directly by the IRA without the need for an LLC.
Examples include:
Real estate syndications
Private equity funds
Venture capital funds
Private placements
Some cryptocurrency investments
Investments that commonly benefit from an IRA/LLC structure include:
Rental real estate
Real estate projects requiring ongoing expenses
Private lending
Short-term lending
Tax liens
Investments requiring frequent transactions
The more active the investment, the more likely an IRA/LLC may provide administrative benefits.
How to Set Up an IRA LLC
Establishing an IRA/LLC requires two primary components:
A self-directed IRA
A properly structured and restricted LLC
Step One: Establish a Self-Directed IRA
The first step in establishing an IRA/LLC is having a self-directed IRA.
A self-directed IRA is an IRA that can invest in any asset allowed by law. Common investments owned by self-directed IRAs include:
Real estate
LLC interests
Limited partnership interests
Notes
Private company stock
Venture capital funds
Private equity funds
A self-directed IRA can be a Traditional IRA, Roth IRA, SEP IRA, or other eligible retirement account.
Most self-directed IRA accounts are funded through:
IRA transfers
Former employer plan rollovers
New annual contributions
Once the self-directed IRA is established and funded, it is ready to invest into the LLC.
Step Two: Establish a Properly Structured and Restricted LLC
The second step is establishing a properly structured LLC.
An IRA/LLC must be established as a manager-managed LLC, and the manager may be the IRA owner so long as the operating agreement restricts certain actions.
You cannot establish an IRA/LLC as member-managed because the IRA is the member and that would mean the IRA custodian would manage the LLC. IRA custodians will reject an LLC if the IRA custodian is required to manage the LLC. As a result, IRA/LLCs are generally established as manager-managed LLCs, with the IRA owner serving as manager subject to the restrictions contained in the operating agreement.
The LLC should have:
Articles of Organization
A properly drafted Operating Agreement
Restrictions designed to comply with IRA rules
Provisions restricting prohibited transactions
Restrictions on compensation to disqualified persons
The operating agreement is one of the most important documents in the structure because it establishes the operating rules and restrictions applicable to the LLC.
The Legal Foundation of IRA LLCs
Some investors mistakenly believe IRA/LLCs are aggressive structures or lack legal support.
In reality, there is substantial authority supporting IRA ownership of entities when structured and operated properly.
Swanson v. Commissioner
Swanson v. Commissioner, 106 T.C. 76 (1996), is one of the foundational cases supporting IRA ownership of entities.
In Swanson, the IRA purchased 100% of the shares of a newly formed corporation. The IRS argued that a prohibited transaction occurred when the IRA acquired the shares.
The Tax Court disagreed and ruled:
“…a corporation without shareholders does not fit within the definition of a disqualified person…”
As a result, the Court determined that the acquisition of the initial ownership interest was not a prohibited transaction.
This case remains important because it supports the concept that an IRA can acquire ownership in a newly formed entity.
One important lesson from Swanson is that the IRA should become the owner of the company upon formation. When properly structured, the IRA acquires the ownership interest directly from the newly formed entity. This helps avoid concerns that ownership was first held personally and then transferred to the IRA.
Hellweg v. Commissioner
The Tax Court again addressed IRA-owned entities in Hellweg v. Commissioner, T.C.M. 2011-58.
The IRS challenged a structure involving corporations owned by Roth IRAs. The Tax Court rejected the IRS’s challenge and cited Swanson in its analysis.
Together, Swanson and Hellweg provide significant authority supporting properly structured IRA-owned entities.
Operating an IRA LLC Properly
Establishing the LLC is only part of the process.
The IRA owner must also operate the LLC properly.
One of the most important concepts to remember is that the IRA owns the LLC. Many investors establish an IRA/LLC and then begin treating the LLC as if it were their own company. It is not. The LLC is an asset of the IRA, just like a stock, note, or piece of real estate could be an asset of the IRA. As a result, the IRA owner must operate the LLC in accordance with the rules applicable to IRAs.
Many prohibited transaction cases arise because investors begin treating the LLC as their own company rather than as an asset owned by their IRA.
What Not to Do: Lessons From the Courts
Several Tax Court cases provide useful examples of mistakes investors should avoid.
Ellis v. Commissioner
In Ellis v. Commissioner, the IRA owned substantially all of an LLC and the IRA owner served as manager.
The operating agreement allowed compensation to the manager, and the LLC paid compensation to the IRA owner.
The Tax Court held that the compensation paid to the IRA owner was a prohibited transaction.
Most practitioners have long restricted salaries in IRA/LLCs when the salary or compensation would be paid to the IRA owner or any other person disqualified to the IRA. Ellis reinforced that position and serves as an important reminder that the IRA owner cannot personally benefit from managing IRA-owned assets.
An IRA owner should not receive compensation from an IRA/LLC for serving as manager.
McNulty v. Commissioner
In McNulty v. Commissioner, an IRA owned an LLC that purchased precious metals.
The precious metals were subsequently shipped to and stored at the IRA owner’s residence.
The Tax Court determined that the IRA owner’s personal receipt and possession of the precious metals resulted in a taxable distribution.
Importantly, the Court did not hold that IRA/LLCs are illegal.
The holding in the case was specific to the personal possession of IRA-owned precious metals. The Court’s decision should not be interpreted as a challenge to the IRA/LLC structure itself.
The issue was the personal possession of the IRA-owned precious metals.
This case serves as an important reminder that IRA assets should not be personally possessed or used by the IRA owner.
Niemann v. Commissioner
Niemann v. Commissioner involved a successful real estate investor who used an IRA-owned LLC for various investments.
The prohibited transaction occurred when assets were transferred between the IRA-owned LLC and entities owned personally by the IRA owner.
The Tax Court concluded that prohibited transactions had occurred, resulting in the disqualification of the IRA.
The lesson from Niemann is that assets owned by an IRA/LLC must remain separate from personal assets and personally owned entities.
IRA LLC Do’s and Don’ts
| Do’s | Don’ts |
|---|---|
| Maintain the LLC’s state registration | Lend money to disqualified persons |
| Maintain separate bookkeeping | Pay yourself compensation from the LLC |
| Maintain a separate LLC bank account | Personally perform labor on LLC assets |
| Provide annual valuations to your custodian | Sign personal guarantees on behalf of the LLC |
| Conduct proper due diligence | Use LLC funds for personal expenses |
| Consult legal and tax advisors when necessary | Personally use LLC-owned assets |
| Report UBTI or UDFI when applicable | Transfer assets between yourself and the LLC |
| Keep ownership percentages consistent | Co-mingle personal and LLC funds |
Frequently Asked Questions
Can I manage my IRA LLC?
Yes. The IRA owner may generally serve as manager of the LLC.
However, the manager should not receive compensation from the LLC.
Can my IRA own 100% of the LLC?
Yes. Many IRA/LLCs are structured with the IRA owning 100% of the membership interests.
Does an IRA LLC file a tax return?
In many cases, no.
When one IRA owns 100% of an LLC, the LLC is generally treated as a disregarded entity for federal tax purposes.
State filing requirements may still apply.
Can I invest additional IRA funds into the LLC later?
Generally, yes.
Additional investments are commonly made by transferring funds from the IRA into the LLC, provided the transaction is structured properly and documented appropriately.
Can I personally guarantee a loan for my IRA LLC?
Generally, no.
Providing personal credit support for an IRA investment can create prohibited transaction concerns and should be reviewed carefully before proceeding.
Final Thoughts
An IRA/LLC can be a powerful tool for self-directed IRA investors who invest in real estate, private lending, and other alternative assets that require ongoing management and transaction activity.
Real estate investors and other alternative asset investors can benefit from an IRA/LLC by having easier transaction processes through the LLC and by having signing authority on an LLC business checking account. The key is ensuring that the proper self-directed IRA is established, that the LLC documents are properly drafted and restrictive, and that the IRA owner understands and follows the rules applicable to IRA investments.
The key is understanding that the IRA owns the LLC and that the prohibited transaction rules continue to apply to the LLC’s activities.
Before establishing an IRA/LLC, investors should ensure they have a properly structured self-directed IRA, properly drafted LLC documents, and a clear understanding of the rules governing IRA investments.
Directed IRA assists investors in establishing self-directed retirement accounts that can invest in properly structured IRA/LLCs and other alternative assets permitted under IRS rules.
