Can My Check Book IRA Establish a Brokerage Account to Buy Stocks?
by Peter Rizzo
While most Checkbook IRA investors are using the IRA/LLC to invest in real estate or other non-publicly traded assets, there are many instances where an IRA/LLC owner would like to invest the cash from their IRA/LLC checking account into stocks or other publicly-traded investments.
One example may be when portions of cash are not yet large enough to make a desired self-directed investment. Or, for instance, when the IRA/LLC is between investments, such as after the sale of an asset or investment and before a new self-directed investment may be found.
This option could also simply arise because the account owner finds a publicly traded opportunity that they would like to pursue using the IRA/LLC account funds and structure.
The CHECK BOOK IRA/LLC may have a brokerage account to buy stocks or other publicly traded assets. This account must be established in the name of the LLC. The brokerage account cannot have a margin account, whereby account trades on credit.
A margin account typically requires the personal guarantee of the underlying IRA/LLC owner, and this would amount to an extension of credit prohibited transaction. Additionally, any profits due from the trading on credit, even if you could get around a personal guarantee, would be subject to unrelated business income tax (UBIT).
What Are the Pros and Cons of Having a Brokerage Account with an IRA/LLC That I Should Know About?
Uninvested or accumulating cash from an income producing asset, often times sits without earning any income in an IRA/LLC. By having a brokerage account with an IRA/LLC, the cash could be invested into stocks or other publicly traded investments, but could still be somewhat liquid in the event that funds are needed for a self-directed investment.
Most brokerage firms do not have a specific account option for IRA/LLCs. As a result, most brokerage firms will simply treat the brokerage account as an LLC brokerage account. The problem with this is that they will send the IRS and your LLC tax reporting via IRS Form 1099-B for trading income. While we’ve had many clients receive and ignore this, because the LLC is owned by their IRA, it does raise concern of an IRS audit for failure to report the 1099-B.
Establish a business brokerage account in the name of the LLC but don’t get a margin account. We have seen clients use E-Trade and Interactive Brokers successfully for this. TD Ameritrade used to offer a specific IRA/LLC brokerage account but now requires customers to just establish an IRA with them instead.
A second option is to establishing a brokerage account with your IRA/LLC, is to simply return funds from the LLC back to the self-directed IRA. This is not taxable. It is a return of investment funds or profits to the IRA. Then transfer funds from the self-directed IRA to a brokerage IRA as a trustee-to-trustee transfer. This is also not taxable. Now, you can buy stocks with the IRA funds in the brokerage account.
When you would like the funds back in the IRA/LLC for a self-directed investment, you would send funds from the brokerage IRA back to the self-directed IRA as a trustee-to-trustee transfer, and would then invest the funds from the self-directed IRA to the IRA/LLC.
While this involves more steps, it’s cleaner in the end as the brokerage IRA will be set-up with no tax reporting to the IRS on trading income.
In the end, both options are viable, but self-directed investors should understand the differences and requirements for each option before proceeding with a brokerage account with their IRA/LLC funds.