The IRS does not give its approval for any particular IRA investment; however, it does prohibit certain types of investments and transactions involving IRAs. You can invest your IRA in a limited liability company, as long as the activity of the LLC does not violate IRA investment rules. In general, an IRA invested in an LLC tends to be complex and requires careful management to avoid tax penalties.
IRA Prohibited Investments
The IRS specifically prohibits two types of IRA investments: life insurance policies and collectibles. The IRS list of prohibited collectibles includes "artworks, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages" and also includes the catchall category of “certain other tangible personal property.” An exception is made for investment in some U.S. gold, silver and platinum coins minted by the Department of Treasury, and gold, silver, palladium and platinum bullion.
IRA Prohibited Transactions
Even though a particular type of IRA investment is not prohibited, certain transactions involving an IRA investment are considered improper by the IRS and are prohibited. These transactions can involve you, your IRA beneficiary or any "disqualified persons" which the IRA defines as members of your family -- such as your spouse, ancestors, lineal descendants, and any spouse of your lineal descendants -- and your "fiduciaries" -- that is, your investment advisers and custodians of your IRA funds. A prohibited transaction is one in which you or any of these person derive a direct or indirect benefit. For example, purchasing real estate with your IRA and using it to reside in either as a primary residence or vacation home is a prohibited transaction.
Investment Restrictions by IRA Custodians
Every IRA account is required to have a qualified custodian -- that is, a bank, federally insured financial institution or other company that is approved by the IRS to act as an IRA custodian. IRAs that are invested in an LLC must still have a custodian. Because IRA custodians have the discretion to impose their own restrictions on IRA investments, you may find that your current IRA custodian will not permit you to invest your IRA in an LLC. Many custodians prefer limiting IRA investments to money market accounts tied to stock market performance. This is due to the relative ease in managing such investments as compared to managing an LLC with real estate or other business assets.
Self-Directed IRA LLC
You can form your own LLC for the purpose of managing your IRA funds and making investment decisions, such as purchasing real estate. To do so, you must locate a custodian whose IRA investment rules permit you to make investment decisions and allow the type of investments you want to make. You will also have to comply with your state's LLC laws regarding creation and maintenance of your LLC, as well as IRS rules regarding prohibited transactions.
- IRS: An Important Message for Tax payers with IRAs
- Internal Revenue Service: Publication 590 -- Individual Retirement Arrangements (IRAs)
- Getting Your Financial Ducks In A Row: 5 No-No's for IRA Investing
- IRS: Retirement Plans FAQs regarding IRAs - Investments
- KEYTLaw: Can the IRA Owner Pay the Costs of Forming an IRA LLC?