IRA Prohibited Transaction Chart
Occasionally we get clients that have a difficult time understanding what a Prohibited Transaction entails. Basically it is either investing in something prohibited or dealing with a prohibited party. It sounds complex but it’s really simple. No Life Insurance or Collectibles and no close family members or entities they own or control.
Perhaps this chart will help those that are more visual. Remember to call us if you have any questions.
Here’s a link to a PDF file in case you’d like to download it: Prohibited Transaction Chart
If I have an SDIRA LLC Checking account. I am the manager of the LLC. Can I write myself a loan? either from the LLC or the IRA?
Reynolds,
As a prohibited party to your IRA, you can’t have any personal use of the IRA funds. Neither can there be a deal or transaction between you and the IRA or the LLC. So, neither the IRA nor the LLC would be permitted to loan you money. There can’t be any transaction or dealings of any kind between you and the IRA or LLC. Hope this helps.
3 questions & please bear with their wordiness, as there are lot of nitty-gritties of moving parts causing possible confusion:
1. There is a guideline that no fees/expenses associated with LLC be paid with personal funds or by prohibited parties. Obviously, this restriction applies ONLY AFTER the IRA funds the LLC, correct? Because following the process from the beginning of LLC setup (state registration fees, registered agent fees), there is no IRA involvement yet & necessiates fees to be paid with personal funds.
Related Question: What about LLC registration renewal (if applicable) & registered agent renewal fees in later years AFTER IRA already funded the LLC? Are those prohibited to be paid by personal funds as well & must they come out of IRA funds? Or can they be similar to very first setup step through personal funds?
2. One initial setup step is LLC establishing checking account at local bank, before IRA can fund LLC (i.e. custodian can trnasfer IRA funds to the checking account). Since almost all bank business checking account openings require minimal nominal deposit (lowest I’ve found is ~ $100), personal funds MUST cover such deposit, correct? Because there is no IRA involvement at that point yet.
Related Question: AFTER the IRA funds LLC, can checking account opening deposit money be withdrawn as personal funds? (Or rather, MUST it be withdrawn to prevent LLC checking account from becoming a mixture of personal & IRA funds causing prohibited funds confusion?)
I’m also assuming any future deposits of personal/prohibited party funds into that checking account constitute as prohibited activity EVEN IF they’re not used towards any investment activity e.g. real estate/precious metal purchasing. Please clarify if this assumption is correct.
For specific case of rare banks with no minimum balance requirement for checking accounts, I thought of a solution to avoid mixup of personal & IRA funds in checking account: Use whatever minimum e.g. $100 personal funds for sake of opening checking account, immediately withdraw them after account is opened & BEFORE IRA funds the LLC. Please comment if you feel I’m being overly paranoid about prohibited funds in checking account on this matter.
3. Regarding IRA custodian fees, again initial account setup MUST occur through personal funds. I didn’t find any mention about custodian fees in your prohibited transaction discussion. What about custodian account fees in later years AFTER the IRA has funded LLC? I’m mostly referring to annual fee custodians charge for maintaining their account. (As well as rare cases of custodian transaction fees should custodian do any future transactions AFTER initial funding of LLC. Although, I can’t imagine what such transactions would be, since initial funding of LLC is THE SOLE intended transaction.)
To summarize the question: Will custodian fees AFTER IRA funded LLC also be covered through personal funds? Or MUST they come through LLC checking account holding IRA funds?
Hi Wilford,
Good questions. Its probably best that you call our office, as answering these questions in full here would take too long. I’ll give a brief answer to each question.
After everything is set up, any fees the LLC incurs, from State registration fees, to annual report fees, to franchise tax fees, to registered agent fees, etc… need to be paid by the LLC.
It is generally ok for the Manager of the LLC to use personal funds to meet the bank account minimum, so long as he is reimbursed. I say generally, because it depends entirely on how the legal documents for the LLC are drawn up. The other option is to have the Custodian process the IRA’s investment into the LLC, and issue a check for the investment, payable to the LLC. The bank account can then be opened with the check.
Once the structure is in place, you do not want to be mixing personal funds in the bank account. Again, depending on the legal documents of the LLC, the Manager may be able to take on small expenses and be reimbursed.
Custodial fees can be paid with personal funds, but the generally have to take the form of reimbursement to the IRA. It depends on the Custodian, but usually the IRA owner can reimburse the IRA for any Custodial fees that have been processed.
As a final note, I don’t think you’re being paranoic at all. You’re being responsible 🙂
Thanks much for as wordy response as my question! 😉 I’m now clear on LLC related fees & bank checking account funds.
I guess I’m more confused than before about IRA custodian fees. Looking at your custodian IRA Services fee schedule, they mention keeping minimum $300 cash balance as well as auto-deducting annual/quarterly asset fees out of account itself. I did rough estimate of future years & decided to leave ~ $5000 floating around in custodian account to allow future deduction of fees & prevent invoicing charges. But it’s the first time I’m hearing of reimbursement of this, which is causing confusion. It sounds like: If IRA services deduct $115 per year from IRA account, I’m allowed to put back $115 of my personal funds back into IRA account. Am I on the right track? Calling your office soon to get sorted out. 🙂
[As if my original post wasn’t long enough, I should’ve also mentioned any possible banking related fees – should they get charged. From your answer, it sounds like LLC can pay such fees to the bank. Will clarify this when I call your office as well.]
I own a home in my individual IRA in my LLC. The renter wants to buy the home can the LLC act as the bank and carry the 1st mortgage?
Thanks
If this can be done can you guys do the legal docs. for this?
Hi Paul,
It is perfectly fine for the LLC to carry a mortgage on the property, provided the purchaser is not a prohibited party. I’ll be happy to walk you through the documentation. Feel free to contact our office at your convenience. Our number is 1-800-482-2760.
I’m just looking into this and want to understand before I tie up the money.
1. Can this be a Roth IRA LLC (and if so, do rents constitute income or capital gains in the account)?
2. If I have income producing real estate in my IRA LLC, and as manager, I place the rents into the IRA’s checking account, when I retire “semi-retire” at 62 as the beneficiary, how do I start withdrawals from the IRA?
3. If I own vacation property in say Florida in my IRA LLC that rents in the high season, can I go as manager to inspect, stay in the property for a week in the off season?
Thanks for you response.
Hi Susan,
To answer your questions:
1. A Roth IRA can certainly own an LLC like this. Profits made from the LLC’s investments would go back into the LLC’s bank account, and would not be taxable, unless the income fell under the Unrelated Business Income Tax or Unrelated Debt Finance Tax provision of the code. Rents do not fall under either of those, unless the property is financed.
2. I wrote an article on how to take a distribution from an IRA LLC. There’s an extra step involved. Because the distribution must come from the IRA itself, first the funds must be sent from the LLC back to the IRA, and then they can be distributed as usual.
3. You can certainly go visit and inspect the property, however I wouldn’t suggest staying in the house while you’re there. That could be viewed as you having personal use of the property, and even though you would be using the property in the capacity of Manager of the LLC, its still too much of a chance to take, to my way of thinking.
Let me know if you have any other questions.
Thanks for your website. To confirm. I can not use a Self Directed IRA to purchase my own residence that has an existing mortgage for the purpose of taking the existing rental income and placing it back into the IRA, as I also live in the property? From what I gather, by living in the property, I am using it personally and that is a prohibited transaction? Is that correct? If say however in the future, I were to consider renting all rooms or the entire house could I then use the IRA to pay off the existing mortgage as a part of the larger investment of having a rental property? My guess, this would still be no as I am personally benefiting by reducing my total personal debt and increasing my personal net worth. I have not as of yet set up an IRA but was curious if this could be applied in this way. If not then I gather it would be better to find a property at arms length that is a separate purchase of a rental property. I also wonder if you could point me in the direction of what IRS regulations to read through to verify the legitimacy of this type of Self Directed IRA? My wife is concerned that this could be very problematic if it is not allowed. Thanks.
1. Can I pay legal fees from my personal account incurred by my IRA Single Member LLC? Is that a deductible IRS expense on my personal return?
Hi Donald,
As the IRA owner you are a disqualified person, so no fees incurred by the IRA LLC may be paid by you. Any fees incurred by the IRA LLC have to be paid by the LLC, or by some other party involved in the deal you’re doing, such as a partner or joint-venture partner. That other partner though, would have to be a non-disqualified person.