Question: I want to form an IRA LLC to be owned by my IRA. Can I pay the costs and expenses to be incurred to form the LLC?
No: The owner of an IRA may not pay any amounts incurred to form an IRA LLC. If the IRA owner pays any debt or obligation of the IRA LLC, it is a prohibited transaction. It is the equivalent of a loan from the IRA owner to the plan, which is prohibited under Internal Revenue Code Section 4975(c)(1)(B). The IRS deems any payment by the IRA owner of the IRA LLC’s debts or expenses as a disguised contribution of money to the IRA.
Notice the net result to the IRA in the following two examples and you will see why it is a prohibited transaction for the IRA owner to pay expenses of the IRA LLC:
Example 1: IRA Owner Pays LLC Formation Expenses
$50,000 = total in IRA account
$ 1,000 = IRA LLC formation expenses paid by the IRA owner from his/her bank account
$50,000 = total capital in the IRA account after paying formation expenses
Example 2: Custodian Pays LLC Formation Expenses
$50,000 = total in IRA account
$ 1,000 = IRA LLC formation expenses paid by the IRA custodian
$49,000 = total capital in the IRA account after paying formation expenses
The proper way to pay the IRA LLC’s formation expenses is to:
- Cause the IRA custodian to write a check payable to lawyer / document preparer who is hired to form the IRA LLC.
- If your current custodian will not allow self directed investments, open an account with an IRA custodian that will allow it. Transfer funds from the current custodian to the new custodian. Cause the new IRA custodian to write a check payable to lawyer / document preparer who is hired to form the IRA LLC.