What Is an IRA LLC and How Does It Work?

An IRA LLC integrates a Limited Liability Company (LLC) within a self-directed Individual Retirement Account (IRA). This specialized structure provides account holders with direct control, known as “checkbook control,” over their retirement funds. Built on a Self-Directed IRA, it allows for a broader range of investment options beyond traditional stocks, bonds, and mutual funds. The IRA LLC is owned by the Self-Directed IRA, with the account holder acting as the LLC’s manager. This role enables direct decision-making and transaction execution from the LLC’s bank account, distinguishing it from conventional IRA structures where custodian approval is typically required for each investment.

Understanding the IRA LLC Structure

The IRA LLC structure involves two distinct legal entities: the Self-Directed IRA and the Limited Liability Company. The Self-Directed IRA, held by a designated custodian, serves as the foundational retirement account. The custodian maintains legal ownership of the LLC’s membership units and handles IRS reporting for the IRA, including Form 5498 for contributions and Form 1099-R for distributions.

The LLC is a separate legal entity, typically a single-member LLC with the IRA as its sole member. This arrangement ensures the LLC’s assets are treated as IRA assets, maintaining the tax-advantaged status. The IRA owner manages the LLC, gaining direct access to its bank account and investment authority.

Funds flow from the IRA custodian to the IRA-owned LLC’s bank account, managed by the IRA owner. This allows the LLC manager to execute investment transactions directly, without prior custodian approval. This separation of roles—custodian as legal holder and IRA owner as manager—is fundamental for IRS compliance, providing asset protection and streamlined investment management.

Setting Up an IRA LLC

Establishing an IRA LLC requires careful preparation and adherence to specific structural requirements. First, select a suitable Self-Directed IRA custodian experienced with alternative assets and capable of facilitating the IRA LLC structure. Evaluate their fee structure and ability to provide compliance guidance.

Next, form the Limited Liability Company. Choose the state of formation based on factors like the IRA owner’s residence or anticipated major asset location. The LLC needs a unique name adhering to state conventions, and a registered agent must be appointed to provide a physical address for official correspondence.

The Operating Agreement is a foundational legal document for the LLC. It must name the Self-Directed IRA as the sole member and define the IRA owner as the non-compensated manager, outlining their investment authority and responsibilities. The agreement specifies the LLC’s purpose is to hold IRA assets and make permitted investments. A single-member LLC owned by a tax-exempt IRA is generally disregarded for federal income tax purposes.

After formation, obtain an Employer Identification Number (EIN) from the IRS for the LLC. An EIN is necessary for opening an LLC bank account and conducting investment activities. Required EIN application information includes the LLC’s name, address, and responsible party details. Finally, open a dedicated LLC bank account to establish “checkbook control.” Banks typically require the EIN confirmation, a certified Operating Agreement, and a letter from the IRA custodian confirming IRA ownership.

Funding and Investment Considerations

Funding an IRA LLC involves transferring retirement funds into its tax-advantaged structure. Annual IRA contributions, adhering to IRS limits ($7,000 for 2024, or $8,000 for those 50 and over), are first received by the Self-Directed IRA custodian and then transferred to the IRA LLC’s bank account.

Existing retirement funds from traditional IRAs, Roth IRAs, SEP IRAs, or 401(k)s can be moved to the IRA LLC via rollover or direct transfer to the Self-Directed IRA. The IRA owner, as LLC manager, then instructs the custodian to transfer these funds to the IRA LLC’s bank account, establishing “checkbook control.”

Once funds are in the IRA LLC’s bank account, the IRA owner, as LLC manager, gains direct control over investment decisions. This allows immediate execution of transactions without custodian approval. IRA LLCs commonly invest in alternative assets not permitted in traditional IRAs, such as real estate, private equity, private loans, precious metals, or cryptocurrencies. This flexibility benefits investments requiring timely action or multiple transactions.

Ongoing Compliance Requirements

Maintaining an IRA LLC requires strict adherence to IRS regulations to preserve its tax-advantaged status. A primary focus is avoiding prohibited transactions, outlined under Internal Revenue Code Section 4975. These rules prevent the IRA owner, their spouse, ancestors, descendants, and controlled entities (“disqualified persons”) from personally benefiting from IRA assets. Common prohibited transactions include using IRA LLC assets for personal benefit, borrowing from the LLC, or engaging in sales, exchanges, leases, or providing goods, services, or facilities between the IRA LLC and a disqualified person.

Another consideration is Unrelated Business Taxable Income (UBTI) and Unrelated Debt-Financed Income (UDFI). UBTI arises if the IRA LLC engages in an active trade or business, not purely passive investments. UDFI applies when the IRA LLC generates income from debt-financed property, like a mortgaged rental. If UBTI or UDFI exceeds $1,000, the IRA may owe tax. The IRA custodian files IRS Form 990-T to report and pay this tax from IRA funds.

Meticulous record-keeping is imperative for all IRA LLC transactions, investments, and expenses. Comprehensive records demonstrate IRS compliance and provide a clear audit trail. While a single-member IRA LLC does not file its own federal tax return, the IRA custodian has annual IRS reporting obligations. The custodian reports the fair market value of IRA assets, including the IRA LLC, to the IRS annually on Form 5498. The IRA owner, as LLC manager, provides the LLC’s asset valuation to the custodian.