Not to sound like a broken record, but a week ago I wrote a blog on the topic of distributions from your self-directed IRA and warned that an IRA account owner be circumspect in how they take out distributions…either elective or required (RMDs). Specifically, “keeping your nose clean” by taking out distributions correctly from your IRA account, even IF your IRA custodian is lax and informs you that you can take an IRA distribution from your IRA LLC or IRA Trust account. Well, now, believe it or not, we are going to address the same type of issue, but this time related to contributions to your self-directed IRA.
Yes, I do receive the occasional question, “Since my contribution is going to be going to my IRA LLC (or IRA Trust) anyways, can’t I just put my contribution into the LLC or Trust?” In short, and in my humble opinion while not giving tax advice, NO! Again, the basic premise being that your IRA LLC or IRA Trust accounts are not the IRA account. Your IRA is funding/capitalizing the LLC or Trust to invest on behalf of its IRA member (LLC) or IRA grantor (Trust)….they are NOT the actual IRA account.
Well, how about to your actual IRA account with the custodian….and, yes, I am being very sarcastic. Of course, it only makes sense that contributions to your self-directed IRA would actually be made to your IRA custodial account. Your IRA custodian has to account for the contribution, they must report contributions, so it only makes sense that you would fill out a deposit form provided by the custodian and indicate what year in which the IRA contribution is being made and accounted for. I think people understand that when they utilize an IRA LLC or IRA Trust structure, they logically understand that neither the LLC or Trust is the actual IRA account. Sometimes I have to re-remind people that the LLC or Trust is the vehicle by which the IRA invests into either structure to make investments on behalf of the IRA. One’s IRA is the member (LLC) or grantor (Trust). But, make no mistake, the LLC or Trust is not the IRA. So, why would anyone, including an IRA custodian, believe it is permissible to make an IRA contribution into the LLC or Trust (directly), when neither the LLC or Trust is the IRA account?!
Good question! I wondered the same thing!
For the life of me, I can’t understand why an IRA custodian would permit an individual to take the “path of least resistance” and make an IRA contribution…let me repeat that, IRA contribution…into an LLC or Trust. Again, neither are the IRA account. Sure, you are going to make the contribution and turn right back and invest those funds back into either structure, but to justify you putting those funds directly into the LLC or Trust is, quite honestly, a big mind-boggling. I am not sure how, nor would I predict the IRS’ response to this practice, but I am not sure why an individual or IRA custodian would risk any negative fallout from taking a distribution in this manner. The educated guess…the IRA account owner has already put the funds into their LLC or Trust account, so the custodian let’s them send in a contribution form without at the same time sending in the actual contribution to the custodian. But to permit this practice is questionable by both the custodian and IRA account owner.
Bottom line: When you want to make a contribution to your IRA, you will complete an IRA contribution form (provided by the custodian) to make your contribution. Yes, you want the funds invested back into the LLC or Trust, so you will request the funds are sent back out to fund the LLC or Trust. Every IRA custodian will have a deposit form and a form to invest the funds back to the LLC or Trust…use it. Okay, yes, it is definitely easier to put the funds into the LLC or Trust account….it just isn’t the right way of doing it!
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. One must always consult with their respective professional in all such matters.