Does My Self-Directed IRA Need An EIN?
Monday, December 2nd 2024
Individual Retirement Accounts (IRAs) have long been essential tools in America’s quest for financial security. Self-directed IRAs offer increased flexibility and control when selecting investments for retirement; however, increased control also comes with additional responsibilities related to tax and compliance regulation – for instance determining whether your self-directed IRA needs an Employer Identification Number. In this post we’ll look into which factors determine this and provide steps on obtaining one should the situation require it.
What Is A Self-Directed IRA?
Self-directed IRAs provide account holders with greater investment flexibility beyond stocks, bonds and mutual funds. Investors may diversify their portfolio with alternative investments like real estate, precious metals, private equity or cryptocurrency to reduce portfolio risk while potentially realizing greater returns and reduced portfolio risks through diversification.
An Employer Identification Number (EIN), also referred to as Federal Tax Identification Number (FTIN), is an eight-digit code assigned by the Internal Revenue Service for tax identification purposes for businesses and other entities such as sole proprietorships, corporations, partnerships, non-profit organizations, trusts and estates among others. EINs serve to uniquely identify these entities for tax identification.
When Does a Self-Directed IRA Need an EIN?
Depending upon its structure and investments, self-directed IRAs typically do not need an EIN as their administration typically falls under one of a custodian or trustee with already an established EIN number. There may however be exceptions where additional identification might be needed:
Checkbook control: IRA LLCs combine the flexibility of an LLC with tax advantages of an IRA to give an investor maximum flexibility while taking full advantage of any available tax breaks. In such structures, an IRA holder creates an LLC owned by their IRA which they then appoint themselves as manager; then investments from this LLC are allocated back into their IRA on behalf of this separate legal entity (with an EIN being necessary as it counts as being a separate legal entity).
Unrelated Business Taxable Income (UBTI)(1): If your self-directed IRA generates unrelated business taxable income (UBTI), an EIN could become necessary. UBTI occurs when an IRA earns income that does not substantially relate to its tax-exempt purpose, such as rental properties with debt-financed mortgages or operating a business within their IRAs. When this occurs, Form 990-T may need to be filed to report and pay tax on this UBTI; which requires you to acquire one before filing Form 990-T with Revenue Canada as soon as possible – thus necessitating EIN numbering for filing forms as well.
Trust-owned IRA: Rarely, an IRA may be structured as a trust with its holder serving as trustee. While this approach may be rarer than expected, as most IRAs are held by custodians or trustees with EIN numbers already. Should you elect to structure your IRA as a trust instead, an EIN number will need to be acquired for it as part of its creation process.
How to Acquire an Employer Identification Number for Self-Directed IRA
If your self-directed IRA meets any of the criteria outlined above, an EIN may be required. To do this, follow these steps.
IRS Form SS-4: When seeking an Employer Identification Number from the IRS, Form SS-4 (Application for Employer Identification Number) will need to be filled out and submitted either online, by fax, or mail. When filling out this form you’ll be required to provide details regarding your self-directed IRA’s structure, purpose and responsible party; when filing out this form in regard to an LLC.
Online application: For quick and hassle-free EIN acquisition, the IRS offers an expedient online application process. Once completed, your EIN will arrive instantly upon submitting the form on their website; all it takes to get one is visiting it yourself and following their instructions!
Fax or mail applications: If you prefer applying by fax or mail, fill out Form SS-4 and send it directly to the IRS fax number or mailing address. Generally speaking, receiving your EIN within four business days via fax; applying by mail could take four weeks – an option we highly advise against!
International applicants: Even without access to either your Social Security Number or Individual Taxpayer Identification Number, an International Investor can still obtain an EIN for a self-directed IRA account by calling the IRS representative on +1 (267) 941-1099 and providing all pertinent details; then they will assign you with an EIN.
How Can An EIN Be Utilized For Self-Directed IRA
Once your self-directed IRA has obtained an EIN number, use it for all tax reporting and compliance obligations that pertain to it – this could include;
Filing Form 990-T: If your self-directed IRA generates unrelated business tax income (UBTI), filing and paying any applicable taxes using Form 990-T with its EIN to report and account for unrelated business income tax liabilities is mandatory.
Banking and investment transactions: For checkbook control IRAs, EIN is necessary when opening bank accounts on behalf of LLC or making investments on its behalf to ensure all transactions are accurately allocated against it and not directly back into account holders themselves.
Recordkeeping: Accurate records need to be kept on your self-directed IRA with regard to investment, transactions and income that it receives or earns through it. This means keeping your EIN number secure in case it’s ever needed in the future to serve for tax or compliance reasons.
Conclusion
While most self-directed IRAs don’t need an EIN, certain circumstances necessitate its acquisition. For example, if your self-directed IRA involves checkbook control IRA structures or generates unrelated business taxable income or is set up as a trust, an EIN must be acquired as it must be used consistently for tax reporting and compliance requirements related to it. Acquiring one should be relatively straightforward but be used consistently throughout its usage process to remain compliant and tax reporting requirements related to self-directed IRA.
Understanding when an EIN is necessary and taking the steps required to obtain one will enable your self-directed IRA investments to comply with IRS regulations and allow you to focus on maximizing its potential and meeting long-term financial goals.
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2 Comments
That’s a lot of forms to fill and keep track of 🙁
Hi Hailey,
Yes, this is partly why we strongly recommend consulting finance professionals who deal with this on a daily basis.
Happy investing!