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I've been reading the excellent book The Self Directed IRA Handbook by Mat Sorensen.

My understanding is that I can achieve personal control of the checkbook for my retirement investments by forming an LLC that is wholly owned by my IRA (not owned by me), with the requirement being that all capitalization of the LLC must come from my IRA's account with its custodian, with no funds ever coming from my personal bank account.

What I can't understand is how the initial funding and formation of the LLC is supposed to happen. In general, investment from the IRA is supposed to come from the IRA's custodian account, and deposited into the LLC's checking account. But, one can't open a checking account in the name of the LLC until the LLC has filed its initial registration with the state. So where does the money for the initial state registration/formation fees come from?

What makes the most sense to me would be to have the formation fees come from the IRA's account with the custodian. But, I haven't seen any custodians offering "LLC formation" as an allowable type of transaction.

The only other possibility I can think of is for the formation fees come out of my own personal bank account. But, that seems contrary to the rule disallowing the IRA owner from capitalizing the LLC.

What's the right order of operations for paying for the formation of an LLC wholly owned by a self-directed IRA?

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    The startup money would come from the IRA as well. The "allowable" transactions you're looking at are probably geared more toward taking money out of the LLC (which is where you can get into trouble) rather then putting it in. Or it's implies as part of one of the other transaction types.
    – D Stanley
    Commented Sep 26, 2017 at 19:07
  • Why do you want to create a self-directed IRA anyways? What are you wanting to do that you can't do with a regular brokerage account?
    – D Stanley
    Commented Sep 26, 2017 at 19:07
  • @DStanley, real estate and cryptocurrencies, for starters.
    – feuGene
    Commented Sep 26, 2017 at 20:28
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    I looked into that some time ago - the rules are simply making sure that the IRA money and any profit that's generated remain in the IRA until you become eligible to draw from them. There is nothing preventing you from paying the formation fees from your own pocket and reimbursing yourself (or not) later.
    – ventsyv
    Commented Sep 26, 2017 at 21:36
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    Pretty sure this violates a lot of arm's length rules and that you're most likely to get into trouble. Just invest in index funds in your IRA and use another account to gamble in crypto markets.
    – Glen Pierce
    Commented Jun 16, 2018 at 4:06

1 Answer 1

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The IRA custodian is supposed to pay the formation costs.

If the IRA owner does it then there is a problem. In some structures, the IRA owner, custodian, trustee, administrator, etc may involve some of the same people. Pay very close attention to these words in the structure you are setting up.

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  • The statement "The IRA custodian is supposed to pay the formation costs" seems like what everyone does, but I can't find any "hard" reference as to why. Can you cite statutes or case law that supports this statement?
    – Matt Klein
    Commented Sep 4, 2020 at 21:26
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    @MattKlein IRA custodians are operating under private letter rulings from the IRS to be a custodian at all, so unless that custodian shares them there won't be a source. People are also operating under the general concept of avoiding self-dealing in any trust or tax advantaged structure, which will have a source and won't specifically mention IRAs.
    – CQM
    Commented Sep 5, 2020 at 12:42
  • I agree the IRA owner can't pay the costs, but I would assume that the IRA (not the custodian) would have to pay the costs to form the LLC. If an investment costs $500 to setup, and the IRA owns the investment, shouldn't the IRA pay the $500? If the IRA custodian pays the start up costs for something owned by the IRA, then isn't that like the custodian putting $500 into the IRA?
    – Matt Klein
    Commented Sep 5, 2020 at 20:58
  • @MattKlein right you could be on to something, as long as the individual is not paying for things for the IRA. The IRA is supposed to be its own legal entity even if the same people are controlling what it does.
    – CQM
    Commented Sep 9, 2020 at 22:47

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