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Can An IRA Be held In An LLC?

Friday, February 23rd 2024

Individual Retirement Accounts (IRAs) have long been at the heart of retirement planning for Americans, offering tax-advantaged savings accounts with which to accumulate savings for later in life. Recently however, limited liability companies (LLCs) have become an increasingly popular tool to protect assets and minimize taxes for both businesses and individuals alike, prompting some people to wonder whether an IRA might also be held within an LLC; we will explore possible scenarios as well as any advantages or disadvantages of holding one within another financial vehicle in this post.

Understanding IRAs and LLCs

Before delving deeper into this topic, it’s essential to establish what IRAs and LLCs are.

Individual Retirement Accounts (IRAs)

An Individual Retirement Account, commonly referred to as an “IRA”, is a tax-advantaged investment account designed to assist individuals save for retirement. There are various kinds of IRAs such as traditional, Roth, SEP (1) and SIMPLE (2) accounts each with its own set of rules and tax advantages: contributions may be tax-deductible while distributions upon retirement will typically be treated as ordinary income while Roth IRA contributions made after taxes but qualified distributions remain tax free.

Limited Liability Companies (LLCs)

An LLC is a form of business entity which affords its owners limited protection against debts and legal actions brought against the entity by creditors of said entity, protecting personal assets of LLC members from being claimed as liabilities for these actions by creditors of said LLC. Furthermore, these types of organizations also allow flexible tax treatment as they can opt to be taxed as sole proprietorship, partnership or corporation depending on specific needs for taxing purposes.

Can an IRA Be Held in an LLC?

An individual retirement account (IRA) can indeed be held within an LLC; however, its holding requires careful consideration as each IRA investment must follow specific guidelines set out by the Internal Revenue Service (IRS) before going ahead with it. An IRA may invest in various forms of assets including real estate, promissory notes and private companies with IRS approval – therefore an IRA could invest within an LLC; however specific rules must be observed otherwise it risks falling foul of IRS rules and regulations.

Another option for holding an IRA within an LLC is through self-directed IRA (SDIRA). Self-directed IRA enables account holders to invest in alternative assets beyond traditional IRAs like private equity, real estate and LLCs. To establish one, the account holders must work with an appropriate custodian who will hold and administer all investments involving LLCs that are part of their self-directed accounts.

Setting Up an IRA-Owned LLC

When an IRA invests in an LLC, it is crucial that they form what’s known as a “checkbook control” LLC in order to be responsible for making investment decisions and overseeing assets held within it. This provides their owner “checkbook control” over investments within this limited liability company (LLC).

Here are the steps required to establish an IRA-owned LLC:

Advantages of Holding an IRA in an LLC

Disadvantages and Risks of Holding an IRA in an LLC

Conclusion

Overall, an individual retirement account (IRA) can be held within an LLC provided that specific rules and regulations are observed. Utilizing self-directed IRAs to invest in LLCs offers greater investment flexibility, checkbook control and asset protection; but comes with increased complexity and potential risk. Before engaging this strategy, it’s vitally important that one consults with an advisor, tax professional or attorney experienced in self-directed IRAs/LLCs so they may assess whether this approach aligns with one’s individual financial objectives and risk tolerance before moving ahead with this strategy.

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