Did you know that you can purchase or sell interests in Limited Partnerships (LP) and Limited Liability Companies (LLC) with your self directed IRA? It’s true, and just another great option for investors who want to be more involved with their IRA and diversify investments.
Let’s look at each one individually to find out what you need to know.
A partnership is a type of unincorporated business organization in which multiple individuals, called general partners, manage the business and are equally liable for the debts of the business. Other individuals, called limited partners, may invest in the business but are not directly involved in management.
Limited partners are liable only to the extent of their investments. Unlike a limited liability company or a corporation, partners share equal responsibility for the company’s profits and losses, and its debts and liabilities. That’s a big difference to note when it comes to LPs and LLCs
The partnership itself does not pay income taxes, but each partner has to report their share of business profits or losses on their individual tax return. Estimated tax payments are also necessary for each of the partners for the year in progress.
Here are some general rules regarding partnerships in a self directed IRA:
- The partnership agreement must permit an individual retirement account or a qualified plan to be a partner.
- The partnership must comply with the appropriate state law, have a determinate life, and be assignable.
- The partnership subscription agreement must be signed by you as having been read and approved, and will be executed by IRA Innovations for your benefit.
- Partnerships may be subject to unrelated business income (UBIT) and other taxes. It’s important to consult your tax advisor for proper direction.
Limited Liability Companies
An LLC is a legal structure that provides tax advantages granted to partnerships by the Internal Revenue Service (IRS) while, at the same time, reducing the legal liability of the individual partners or owners in the same way that a corporation would. LLCs function like most corporations, but they are much less difficult to organize, and they combine favorable features of LPs.
People who have ownership interests in LLCs are called members, instead of stockholders or partners. Investments in these legal structures are called membership interests and units, as compared to shares of stock.
An LLC provides the corporate advantage of limited liability protection—meaning it protects members from personal liability for debts of the LLC—with the partnership advantages of passing through income to its members without tax at the partnership level.
With LPs and LLCs, the profits pass through to the IRA without being taxed. The income is tax exempt for the IRA, but the IRA is protected from third party claims against the LP or LLC. Both are great options to consider for your self-directed IRA.
IRA Innovations provides self-directed retirement account administration and education. As the experts when it comes to “alternative” investments including private equity, they can provide the necessary tools and information to get started with a real estate IRA.