Can A Self-Directed IRA Be An LLC?

Wednesday, May 29th 2024

As investors seek to diversify their portfolios and take more control over their retirement accounts, self-directed Individual Retirement Accounts (IRAs) have become an increasingly attractive solution. Offering greater degrees of flexibility than conventional IRAs, self-directed IRAs enable individuals to invest in alternative assets ranging from limited liability companies (LLCs) to real estate. We will examine both its feasibility within self-directed IRAs as well as potential advantages or drawbacks associated with using LLCs within them.

Understanding Self-Directed IRAs

Self-directed IRAs (or Individual Retirement Accounts, “IRAs”) provide individuals with more flexible investment opportunities compared to traditional IRAs which may only permit investments in stocks, bonds and mutual funds. An IRA holder with this type of account could invest in real estate properties, precious metals investments and private equity assets among many others compared with stocks, bonds and mutual funds typically limited in scope.

Self-directed IRAs provide greater control and diversification to investors; however, this additional flexibility comes with additional responsibilities: as account holder you must actively oversee investments made within this account to comply with IRS rules pertaining to self-directed IRAs.

Limited Liability Companies (LLCs) provide limited liability protection.

LLCs (limited liability companies) are legal business structures that combine the limited liability protection offered by corporations with the flexibility and tax advantages associated with partnerships. Their popularity among small business owners and entrepreneurs due to ease of formation and management as well as protection of personal liability is widespread.

Can a Self-Directed IRA become an LLC?

Yes – self-directed IRAs may invest or own an LLC. However, to comply with IRS regulations and avoid potential pitfalls when doing so is to understand its nuances thoroughly.

An IRA investing in an LLC becomes a member or owner of that LLC and this arrangement is often known as a checkbook control self-directed IRA because the managing member (typically an IRA owner) can write checks directly for investments to manage assets within his/her IRA account while still enjoying tax advantages associated with owning one. Such structures offer high levels of control and flexibility while still meeting tax benefits associated with retirement accounts.

Benefits of Utilizing an LLC in a Self-Directed IRA

Greater control: With a checkbook control self-directed IRA, its owner has complete power over investment decisions made by their LLC, making for faster decision-making and potential more effective asset management of his/her IRA’s funds.

Reduce custodial fees: Many self-directed IRA custodians charge fees per transaction within their accounts; by creating an LLC instead, self-directed IRA owners can reduce these costs significantly by consolidating multiple transactions under its auspices and reduce custodial fees accordingly.

Asset protection: As an LLC member, an IRA usually receives limited liability protection that shields its assets from creditors and lawsuits brought by other members.

Tax advantages: Like its traditional IRA counterpart, investing self-directed IRA assets into an LLC provides tax-deferred growth on those assets invested; additionally, depending on where its LLC structure operates it may provide state level tax breaks that could bring further advantages for tax relief.

Potential Drawbacks and Risks

Prohibited transactions (1): The IRS maintains stringent restrictions regarding prohibited transactions within self-directed IRAs. Any time that their assets are engaged in any type of prohibited transaction by themselves or disqualified individuals, their tax advantaged status could be at stake and serious tax penalties imposed; owners should ensure their LLC activities don’t breach this requirement.

Unrelated Business Income Tax (UBIT) (2): If an LLC within an IRA generates income that does not relate directly to investment activities, such as trading or selling goods/services not directly related to them, this income could potentially be subject to Unrelated Business Income Tax (UBIT), an increasingly complex form of tax that may offset some of its advantages when used within self-directed IRAs.

Increased complexity: Navigating an LLC within a self-directed IRA is more challenging than managing traditional IRAs; not only must an owner comply with IRS regulations for self-directed accounts but they must also handle its legal and financial requirements as an LLC owner.

Legal and regulatory risks: Because checkbook control self-directed IRA structures haven’t been sanctioned explicitly by the IRS and there’s limited guidance available, their owners could face potential legal and regulatory risks that aren’t readily apparent.

Establish an LLC Within a Self-Directed IRA

To establish an LLC within your self-directed IRA, several steps must be followed carefully:

Create a self-directed IRA: When opening a self-directed IRA account, seek a reliable custodian that supports investing in alternative assets (e.g. LLCs) such as LLCs. Once complete, open an IRA with them.

Create an LLC: When setting up an LLC, seek advice from a competent attorney or professional service to ensure compliance with state and federal regulations. Your operating agreement should take the investment from an IRA into consideration while also protecting from prohibited transactions.

Fund your LLC: Transfer funds from Your self-directed IRA directly into its bank account for use as funds in funding the LLC’s bank account, working closely with both custodian and bank for this step.

Investment management: If you are the managing participant in an LLC, you will exercise all the power of its investments. Be sure that all actions are governed by IRS regulations governing self-directed IRAs.


Self-directed IRAs offer investors greater control, flexibility and asset protection by investing or owning LLCs; however this structure comes with increased complexity and potential risks such as prohibited transactions and UBIT. Investors considering taking this route should consult a professional before taking this approach to ensure compliance with IRS rules and regulations as well as understanding any benefits or drawbacks of using an LLC within an IRA.

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