Why Open a Roth IRA LLC?
- Roth IRAs allow you to invest after-tax money and take tax-free distributions after you reach the age of 59 1/2 (you can remove your contributions, but not your earnings, at any time). With few exceptions, the IRS does not tax the gains or income on assets inside an IRA. You can contribute a maximum of $5,000 as of 2010 ($6,000 if you are over the age of 50), and in future years, the maximum annual contribution will be indexed to inflation. Your ability to contribute to a Roth IRA phases out based on income, so check current tax tables pertaining to your situation.
- Setting up a Limited Liability Company (LLC) allows you to structure your business so that you are not personally liable for its debts and other contractual obligations. Part corporation, part partnership, LLCs enjoy the best of both worlds. “Members” (owners) of LLCs can be individuals, corporations or even other LLCs. More importantly, your self-directed IRA can be an LLC member. LLCs, including an LLC inside a Roth IRA, can run almost any type of business, such as buying and selling real estate, dealing in precious metals or even lending money.
- Your IRA LLC can't do business with immediate family members.family with heart image by Pix by Marti from Fotolia.com
You can’t use your IRA LLC to purchase life insurance or collectibles, and your LLC can’t engage in business with immediate family members, including their spouses, who own 50 percent or more of a business. The IRS defines immediate family members as including the two generations above you and below you. The IRS also disallows self-dealing, such as if your LLC were to purchase a house and you then lived in it. Finally, earnings and profits cannot be removed without incurring tax penalties until you are 59 1/2. - An IRA requires a professional custodian. Brokerage firms and banks, the traditional custodians of IRA assets, generally do not allow the kinds of non-traditional businesses and assets discussed earlier, so you will need to find a custodian that does (see Resources). You must then complete the documentation required to create a legally viable LLC and obtain a Federal tax ID number. From there, you can open a checking account at your local bank in the name of your LLC and start your business.
- The IRS limits additional funding of your LLC business to the maximum allowable IRA contribution in any given year, which can make infusions of additional capital difficult. If your LLC business venture fails, you could wipe out your retirement assets and find it difficult to build them back in the shorter time left. Finally, you retain responsibility for ensuring that all LLC business operations are in compliance with IRS regulations for IRAs.
