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Using a Brokerage Account, Real Estate Investing and more | Client Q&A

AdMail Podcast
4 Minute Read

In this week’s episode, IRA Financial’s Adam Bergman Esq. answers questions about brokerage accounts in an IRA LLC, mixing personal funds with IRA funds to invest and recourse loans and UBTI.




Question 1 from Brian A in Corpus Christie, TX: If I want to open a brokerage account for my IRA LLC – can I open the account in the name of the LLC?

Brian utilizes the Self-Directed IRA LLC solution, also referred to as a Checkbook Control LLC. The IRA owns the LLC, and is funded with money from the IRA. Therefore, you (or Brian), the IRA owner, manages the IRA LLC, however, the IRA owns the LLC. The investments are made from the LLC and should be named as such.

There are generally two choices here. The brokerage account can be opened by the LLC or one can be opened with the IRA itself. Many of the large brokerage houses will allow this, like Charles Schwab and Fidelity. However, we feel TD Ameritrade is the best option because they have a specific account for retirement plans. A headache can be caused with respect to tax reporting. The brokerage company sees that an LLC is doing the investing and will send out a 1099. Of course, in Brian’s instance, the LLC is owned by the IRA. Therefore, no taxes are due on the income generated from the IRA LLC investments. The IRS may come looking for their cut. You would simply provide the right documents showing that you do not own the LLC; your IRA does. This is not an issue with TD, as they know that you do not need the 1099 for your IRA LLC.

The other option is to not use an LLC. If you have funds in the LLC you would like to invest in a brokerage account with, you can send those back to your IRA custodian, such as IRA Financial Trust. Your custodian would send the money to your chosen brokerage account, in the name of the IRA. Since the IRA is directly investing, there is no issue with any tax reporting. Both options are viable, but one may suit you better than the other.

Question 2 from Anonymous: I have a Self-Directed IRA through a different company (sorry). However, I have been watching your videos and I am concerned I may have done a prohibited transaction because I invested in an LLC to own real estate with personal funds. The breakdown is 70% IRA and 30% personal funds. Do you think I have an issue?

Mr. Bergman strongly advises not to co-mingle personal and retirement funds when making an investment. This is because it opens up the investment to IRS attack. If at all possible, the investment should be made with just the Self-Directed IRA funds.

It’s one thing to invest in a public company or really large investment funds with both personal and retirement funds. Your investment is just a drop in the bucket. It’s important to remember that the IRA can be the only thing that benefits from the investment is makes. You cannot benefit personally. If you need to co-mingle funds, you must be sure that it doesn’t violate the IRS rules.

If Bill Gates was looking to make an investment with both types of funds, it’s easy for him to prove that he could afford the investment by just using personal funds. Similarly, it’s up to you to prove that you are not violating the prohibited transaction rules. The IRS may come knocking and ask why you set up the investment this way? Could you afford to buy the property personally, or did you need the IRA funds to complete the deal?

In the end, if you maintain that you did not break any IRS rules, all expenses, income generated and such should be split pro rata by the two investors (the IRA, and yourself). If and when you sell the property, the IRA should receive 70% of the proceeds and you should take 30% personally.

Question 3 from Eric T in Duluth, MN: Your website talked about non-recourse loans and UBTI – what about recourse loans? Would that trigger UBTI?

A recourse loan, one that you can personally guarantee, is not allowed with retirement funds. Only nonrecourse financing can be used, since it won’t violate the prohibited transaction rules. For example, an IRA cannot guarantee a loan (such as a mortgage) that is taken for an investment. In our line of business, recourse loans are not applicable.

There is actually a way to get a recourse loan, even with an IRA. You can partner with other people, who are not disqualified, and make an investment. Those other investors could guarantee the loan, since you (your IRA) cannot. And yes, if you need financing to buy a real estate property, the UBTI tax will apply, even if you were able to use a recourse loan. Note: if you use a 401(k) plan to invest, there is an exception for the UBTI tax.

AdMail – Keep it Coming

We hope you enjoyed the latest episode of AdMail. Mr. Bergman will continue to respond to questions each week so long there is a demand for them! If you have any questions for him, email him at [email protected].

As with his other podcasts, you can check out AdMail on SoundCloud. Be sure to subscribe to know when the next one pops up! Thanks for listening and have a great day, Self-Directed Nation!

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