Can I Invest My IRA in an LLC?

Choosing alternative investments for your individual retirement account can provide you with diversification and the potential for large investment gains. If you want to invest in a limited-liability company with funds from your individual retirement account, you may run into some complications along the way depending on the type of broker you have.

IRS Rules

When it comes to choosing investments for your IRA, you have to abide by the rules set forth by the IRS. The IRS has only a few restrictions when it comes to investing the funds from your IRA. You are not allowed to put money into collectible items such as stamps or baseball cards and you cannot invest in life insurance policies. Another restriction is that the transaction cannot benefit you personally in some way other than to give you a return for your IRA. This leaves the door open for investing in an LLC.

Working With Your Broker

If you wish to invest in a specific LLC, you will have to work in conjunction with your broker to make it happen. Some brokers do not allow individuals to invest in items such as LLCs. They may only allow investments in traditional securities like stocks and bonds. If this is the case, you will need to open a self-directed IRA. This can be done by working with a custodian, such as the trust department at a bank. Self-directed IRAs allow you to invest in anything that is not prevented by the IRS.

Investing in LLC

Once you have the IRA set up correctly to invest in an LLC, you will need to come to an agreement with the other owners of the LLC. An ownership agreement must be drafted that outlines how much you will invest and what percentage of ownership you will get in return. You and the other owners of the LLC will need to sign the agreement to ensure that it is legally binding. When drafting the agreement, make sure that your IRA is the owner listed on the agreement.

Self-Directed IRA

Some people use an LLC as a way to set up a self-directed IRA. They create an LLC and then fund it by investing in it through an IRA. They set up an agreement that shows the IRA purchased ownership in the LLC. Then the LLC can conduct business deals and investments without having to deal with any scrutiny. For example, the LLC could invest in a franchise or racehorses without any complications to worry about.