Questions People Ask

Can My IRA Invest in Any Type of Asset?

Question:  Can I cause my self-directed IRA to invest in any type of asset I desire?

Answer:  No.  Section 408(a)(3) of the Internal Revenue Code says that an IRA may not invest in life insurance contracts (life insurance).  The IRS also restriction investments in “collectibles.”  Here is what IRS Publication 590 says about IRAs investing in collectibles:

“If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later.

Collectibles.  These include:

  • Artworks,
  • Rugs,
  • Antiques,
  • Metals,
  • Gems,
  • Stamps,
  • Coins,
  • Alcoholic beverages, and
  • Certain other tangible personal property.

Exception.  Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.”

Can My IRA Invest in Any Type of Asset?2018-05-13T13:58:52-07:00

Can the IRA Owner Pay the Costs of Forming an IRA LLC?

Question:  I want to form an IRA LLC to be owned by my IRA.  Can I pay the costs and expenses to be incurred to form the LLC?

No:  The owner of an IRA may not pay any amounts incurred to form an IRA LLC.  If the IRA owner pays any debt or obligation of the IRA LLC, it is a prohibited transaction.  It is the equivalent of a loan from the IRA owner to the plan, which is prohibited under Internal Revenue Code Section 4975(c)(1)(B).  The IRS deems any payment by the IRA owner of the IRA LLC’s debts or expenses as a disguised contribution of money to the IRA.

Notice the net result to the IRA in the following two examples and you will see why it is a prohibited transaction for the IRA owner to pay expenses of the IRA LLC:

Example 1 IRA Owner Pays LLC Formation Expenses

$50,000 = total in IRA account
$  1,000  = IRA LLC  formation expenses paid by the IRA owner from his/her bank account
$50,000 = total capital in the IRA account after paying formation expenses

Example 2Custodian Pays LLC Formation Expenses

$50,000 = total in IRA account
$  1,000  = IRA LLC  formation expenses paid by the IRA custodian
$49,000 = total capital in the IRA account after paying formation expenses

The proper way to pay the IRA LLC’s formation expenses is to:

  • Cause the IRA custodian to write a check payable to lawyer / document preparer who is hired to form the IRA LLC.
  • If your current custodian will not allow self directed investments, open  an account with an IRA custodian that will allow it.  Transfer funds from the current custodian to the new custodian.  Cause the new IRA custodian to write a check payable to lawyer / document preparer who is hired to form the IRA LLC.
Can the IRA Owner Pay the Costs of Forming an IRA LLC?2017-09-10T15:33:14-07:00

Can My IRA Invest More Money into an LLC Partially Owned by My IRA?

Question:  Two years ago my spouse and I caused our IRAs to make self-directed investments into an LLC that purchased a rental home.  Each IRA is a 50% member of the LLC.  The property needs repairs that will cost more money than the LLC has available.  Can we cause our IRAs to make additional capital contributions to the LLC to fund the repairs?

Answer:  No.  If either IRA were to make an additional capital contribution to the LLC, it would create a prohibited transaction under Internal Revenue Code Section 4975(c), which provides that a:

“prohibited transaction” means any direct or indirect— . . . transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan”

Because the two IRAs each own 50% of the LLC, the LLC is a disqualified person under Section 4975(e)(2)(G).  This provision says that a disqualified person is an entity 50% or more of which is owned by a fiduciary.  Each IRA custodian is a fiduciary with respect to its IRA account and because the custodian owns 50% of the LLC, the LLC is a disqualified person.  Therefor a transfer of money from the custodian to the disqualified person (the LLC) to fund the repairs is a prohibited transaction.

Can My IRA Invest More Money into an LLC Partially Owned by My IRA?2018-05-13T13:58:53-07:00