IRA LLC Mistake #1 – Making Contributions to the IRA LLC
The most common IRA LLC mistake happens when the Self-Directed IRA owner wants to make an annual contribution to the IRA and does not send it to the IRA Custodian first, but instead writes a check to the IRA LLC and deposits the money into the LLC checking account. In this case, you are personally interacting with our IRA LLC. That is considered a prohibited transaction. Remember your IRA contribution is only considered valid when it has been received by your IRA Custodian. The correct way to do this is to send your IRA Custodian your contribution and have them send a check to the IRA LLC as a capital contribution.
IRA LLC Mistake #2 – Engaging in a transaction with a disqualified party
A key rule that you must know if you are going to have a Self-Directed IRA and take Checkbook Control of your IRA is Internal Revenue Code 4975. It has a specific list of persons and entities who are prohibited from interacting with your IRA-owned LLC. The list includes you and your spouse, your children and your grandchildren, your parents and your grandparents and all their spouses. It also includes any business that any of those individuals own 50% or more. It is your responsibility to act in the best interest of the LLC and to understand the rules regarding self-dealing.
IRA LLC Mistake #3 – Use of personal assets and sweat equity
The owner of the IRA is clearly allowed to manage the investments of the Checkbook Control IRA LLC. The management can be very involved; it could require considerable effort to find the right piece of real estate and the right tenants. The problem is a prohibited transaction or indirect benefit line could be crossed if the IRA owner were to use their personal tools and equipment to improve the property. Another mistake is the IRA owner provides all of the labor for making the improvements. You can manage the IRA LLC assets, but you should not provide sweat equity or use any personal assets to improve the property.
IRA LLC Mistake #4 – Making a personal guarantee
The IRA owner is a disqualified person and cannot make a personal guarantee of a loan for the IRA LLC. The account holder cannot guarantee a loan to purchase property, nor could you open a margin account at a brokerage firm in which you personally guarantee to cover any margin calls. This could also apply in cases where the LLC is attempting to get a credit card from the bank, and the bank requires a personal guarantee on that card. IRA holders cannot extend credit to the IRA-owned LLC.
IRA LLC Mistake #5 – IRA Owner Receives Fees or Commissions from IRA Transactions
There are cases where an IRA owner is also a real estate agent and they want to earn a commission from selling property to their IRA-owned LLC or some other disqualified party’s IRA LLC. This transaction would be viewed as conducting a transaction with your IRA or receiving an indirect benefit and would be considered a prohibited transaction. If you or a disqualified party is receiving a direct benefit from the IRA, this is clearly not allowed.
There are those that would say “that a disqualified person can be paid reasonable fees and expenses for providing services to the IRA”. Such an example could be that your spouse is an attorney and your Self-Directed IRA LLC hires her to review a legal contract that your LLC is about to engage in. There are not any clear guidelines as to what is “reasonable fees.” So, my position on any transaction with a disqualified person is just don’t do it! If you feel your situation may be an exception to this, then you should get someone with extensive knowledge of ERISA rules to give you an opinion. As harmless as some of these transactions may appear to be, I feel it is better to stay clear of having a potential prohibited transaction in your IRA LLC.
We do not offer legal advice and would recommend that you get legal advice before engaging in any transaction with your IRA-owned LLC.