Can My Grandchild Borrow Money from My IRA LLC?
Question: My IRA is the sole member of my IRA LLC. Can my IRA LLC loan money to my grandchild?
Answer: Legally yes, but the loan would be a transaction between the IRA LLC and a disqualified person, which is a prohibited transaction under Section 4975(c) of the Internal Revenue Code. A disqualified person includes ascendants (parents and grandparents) and descendants (children, grandchildren, etc.) of the owner of the IRA and spouses of descendants.
Consequences of a Prohibited Transaction
An IRA LLC that engages in a prohibited transaction will cause the IRA to lose its tax-exempt status as of the first day of the tax year in which the prohibited transaction occurs. This means that the IRA is deemed to have distributed to the IRA owner all of the assets in the IRA and the IRA owner must include in income for the year the fair market value of the assets as of the first day of the year unless the IRA is a Roth IRA. If the IRA owner is under 59 1/2, the distribution will also cause a ten percent penalty.