0

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?

  • 1
    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 Sep 26 '17 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 Sep 26 '17 at 19:07
  • @DStanley, real estate and cryptocurrencies, for starters. – feuGene Sep 26 '17 at 20:28
  • 2
    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 Sep 26 '17 at 21:36
  • 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 Jun 16 '18 at 4:06
0

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.

  • 2
    I'm generally inclined to take this perspective with tax questions, "just do it, and if later you turn out to be wrong then just pay the penalty." But apparently if an IRA owner engages the IRA in a prohibited transaction, the consequence is that the ENTIRE IRA is disqualified and therefore distributed, incurring the same taxes and penalties as any other distribution. That's too big a penalty to risk. – feuGene Oct 18 '17 at 13:11
  • you're right I'll have to edit my answer – CQM Oct 18 '17 at 14:56

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.