IRA Owned LLCs – Can your Roth and Traditional Co-Invest in One?

IRA Owned LLCs – Can your Roth and Traditional Co-Invest in One?

The answer is “yes” your Roth and Traditional IRAs can co-invest, but this situation creates some issues that make us uneasy about unsophisticated account holders:

Funding the IRA-Owned LLC

If you fund an LLC with both type of funds (Roth and Traditional) then you can never allow the percentages of ownership change for any subsequent fundings. The requirement usually is that you need to fund for both members on a pro-rated, equal amounts. The reason for this is that you cannot skew ownership between the two types of accounts. The problem that usually that arises is that people run out of Roth money but they have other funds. The entity effectively becomes locked and can starved for cash because you cannot match the Traditional’ s contribution with Roth funds.

Contributions

When you co-invest two IRA accounts the contributions to the IRA-Owned LLC have to be on proportional percentages. You cannot put in $10 from the Traditional, and give it 50% and then $1 from, the Roth and give it 50%. The percentages need to be based upon the mathematical percentage of the dollars contributed from each.

File a 1065

The LLC becomes a partnership and is now required to file a 1065 partnership return each and every year. The LLC has to issue K-1s to each member/account. Those K-1s have to be mailed to us and reported to the IRS.

Bottom Line

The bottom line is that have a multi member LLC is usually beyond the administrative grasp of the average account holder and they routinely make one of more critical mistakes that puts their account(s) in prohibited transaction jeopardy.

We would not prevent the funding, but we will make the account holder sign some acknowledgement before we allow it.  As always, seek tax advice if you have tax-filing questions.

To read more about the IRA-Owned LLC, call us or click HERE

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