Self-directed IRA LLC investors are understandably concerned about complying with IRS and DOL Prohibited Transaction rules, but they can often forget some rules for IRA LLC contributions and distributions. Don’t be laxed, confused or ambivalent about important rules for contributions and distributions from your IRA account when utilizing an IRA LLC structure. It is always important to pay attention to the rules for IRA LLC contributions and distributions so that unintentional mistakes are not made.
Occasionally, clients may ask questions regarding rules for IRA LLC contributions and distributions. How do I make a contribution to my IRA? Can I make a contribution into my LLC? How do I take an elective or RMD? Can I just take it from the LLC? Keeping in mind the rules for IRA LLC contributions and distributions, you must always remember one, very important thing:
The LLC that your IRA has invested (capitalized) into, is NOT your IRA. It is an LLC account. You can only make a contribution to an IRA account (with the custodian), and you can only take a distribution from your IRA account as well.
Let’s break this down a bit…
1. Rules for IRA Contributions — Notice I didn’t say “rules for IRA LLC contributions!” That’s because, again, your LLC is not your IRA. If you are wanting to make a contribution to your IRA, it must be made to your IRA account at your self-directed IRA custodian. Some people will say, “that seems like a hassle….you mean I have to send a contribution check to the IRA custodian first, even if I am going to turn around and have the funds go back (capitalizing) the LLC account?” Uh, yeah, so sorry, so sad! Okay, not being mean, but here is why the answer is a big YES.
IRA contributions are a reportable occurrence, with the IRA custodian being required per IRA law to report the contribution. As such, it is the responsibility of the IRA custodian to receive the contribution for your IRA account. The contribution cannot be made to the LLC account. Again, the LLC is NOT your IRA! To make a contribution correctly, the IRA account owner would complete the IRA custodian’s “deposit” form (a contribution form used by an IRA custodian where you indicate the reason (contribution) for sending the funds to the IRA custodian on behalf of your IRA account).
But you ask, “but I want my contribution to still go to the LLC account for investment purposes.” No problem. Every self-directed IRA custodian has a corresponding form that you will submit (probably in the same envelope you used to mail your contribution) to further request that once the IRA contribution has been deposited and cleared, to request the funds be capitalized back to the LLC account.
Yes, is it easy to be tempted to put the money directly into your LLC account? I am sure it is, but do not do it as it is an incorrect manner of a contribution and is not permitted!
2. Rules for IRA Distributions — Well, since I gave a detailed breakdown on the rules for an IRA contribution, wouldn’t it only make sense that the rules for an IRA distribution would follow similar, but, actually, reverse steps? Yes, if you are taking a distribution from your IRA (assuming you do not have a cash balance held in your IRA account with the IRA custodian, of course), yes, the distribution must come from your IRA custodian account (not LLC) as all distributions you take must be reported by the IRA custodian. This is, again, IRA law!
Remember the “deposit” form of I spoke of earlier? Same thing…you will write a check from your LLC account to return back to your IRA account with the IRA custodian through designation on this form. Once the IRA custodian has deposited the funds back to your IRA account, you can submit to them a distribution form where you instruct them to send you a taxable (if traditional, pre-tax IRA account) distribution to you.
Whether you are Making a contribution, or Taking a distribution always visualize and remember that all contributions and distributions must be processed through your self-directed IRA custodian for reporting purposes. While it is an easy step to remember, there are folks who can get momentarily confused.
So we are on the same page that all IRA contributions and IRA distributions are processed through your IRA custodian for reporting purposes. What about investments that your IRA LLC has made? Must expenses paid or earnings received be processed through the IRA custodian?
NO, this is the very reason why you established the IRA LLC in the first place…the freedom and flexibility to not process every investment transaction through a custodian. Asset purchased? It is purchased in the name of the LLC. LLC asset expense (e.g., property taxes)? Paid by the LLC. LLC asset investment earnings (e.g., rental income)? Received by the LLC. As you can see, once the LLC is capitalized by your IRA (where the IRA is the member of the LLC), it is responsible to act on behalf of the member (IRA) in a manner that complies with all IRS regulations.
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.