When an employee leaves a job, he can take his 401k and roll it over into a self-directed Individual Retirement Account (IRA) to obtain more investment options and control over the assets. Some IRAs may be established as an IRA LLC, a limited liability company, to use the retirement assets for real estate or private business investment. There are pros and cons to doing this.
Investment Diversification: Pro
Opening an IRA LLC allows an investor the opportunity to invest in more than just stocks, bonds or bank accounts. The IRS allows investors to purchase investment property or set up personal businesses under the LLC designation. This benefits investors who want to utilize experience or expertise in these types of investments. For those venturing out and opening a small business, their 401k assets may be the largest accessible asset they have. Being able to use the money for operating expenses without taking early distributions allows the business owner to reduce debts when starting a business and retain a certain amount of profits within the IRA, continuing to defer taxes.
Unlike bank or brokerage IRA accounts, the IRA LLC requires proper business establishment with appropriate written agreements created between the LLC and the IRA. Establishing the company and agreements often requires hiring an attorney or CPA who is well versed with these accounts. This is an additional cost, which makes establishing these accounts more expensive. Some IRA LLC business accounts, such as the "Business Owners Retirement Savings Account," can cost several thousand dollars to establish. These accounts may also have higher annual expenses including taxes on some of the business profits. The added costs make IRA LLCs prohibitive to some investors.
Aside from the increased paperwork in creating the IRA LLC, investors must be versed in the added regulations of owning an IRA LLC. Some of the regulations include not using real estate investments for personal use, even vacation homes. Immediate family are also not permitted to use the property. Doing so results in the entire property being distributed from the IRA with taxes and applicable penalties. For business owners using an IRA LLC to fund business operations, the IRA is buying corporate stock in the company and using the cash for operations. The owner must not have exclusive control over payroll or use the assets as a way to funnel IRA assets out. Using a CPA versed with these accounts can help a small business owner maintain proper regulations and avoid penalties.