We have been informed by the custodian, that some investors have not been following proper procedures, thereby inadvertently putting themselves at risk of participating in a Self Directed IRA LLC Prohibited Transactions.
Self Directed IRA LLC Prohibited Transactions
It is imperative that you understand and follow Prohibited Transactions Rules in IRA LLCs. The penalty for participating in a Prohibited Transaction is a full distribution of the IRA, which may be a taxable event subject to additional penalties.
Funds from another qualified retirement plan and contributions must not be deposited directly into the LLC checking account. As this is a reportable transaction, contributions must first be deposited to your custodial account with the Trust company. If you wish to subsequently move funds to the LLC checking account, you must ensure that it is permitted by the Operating Agreement or as per an attorney’s letter of opinion on file. An Investment Authorization form must be completed to direct the custodian to move the funds to the LLC checking account. The custodian then will send the IRS (and you) a Form 5498 reporting their yearly contributions.
Distributions must not be withdrawn directly from the IRA LLC checking account. As this is a reportable transaction, the funds which you wish to take as a distribution must be directed back to your custodial account, and subsequently distributed to you upon receipt of a completed Distribution Request form. The custodian will then send the IRS (and to you) a Form 1099R reporting their yearly distributions.
Investment income, returns and dividends from investments vested in the IRA LLC’s name must be deposited to the LLC checking account. You do not have to send the funds back to custodial account unless you would like to take a distribution. You may re-invest these funds in something else if you wish to.
Investment-related expenses such as premiums, property taxes, HOA fees, repair and maintenance bills, utility bills, etc. must be paid out of the LLC checking account, not your personal checking account. Paying investment-related expenses using personal funds constitutes “self-dealing”, which is a type of Self Directed IRA LLC Prohibited Transactions.