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Do you have a retirement account owning a single-member limited liability corporation (LLC)? If so, you may be like many investors who use the pass-through entity as its own investment vehicle. However, some using an IRA-owned single-member LLC for this purpose seem to confuse IRA distribution rules.
Even though an IRA-owned single-member LLC can be used as its own investment vehicle, IRA distribution rules still apply. This means a distribution must come from the IRA itself.
In general, a distribution occurs when you take money or assets out of your retirement account. Depending on your age, account type and the distribution reason, this action may result in a taxable event. No matter what assets are owned by an IRA, the distribution rules remain the same.
Depending on your account type, you may have required minimum distribution (RMD) rules to consider as well. You must begin to take money out of your IRA, 401(k) and other tax-deferred plans at age 70½. These distributions are taxed as regular income based on your tax bracket for the year of withdrawal. This rule is likewise unaffected by the type of assets owned by the account.
So, in a nutshell, IRA-owned single-member LLCs do not change distribution rules and requirements. However, the way many utilize the LLC structure seems to create some confusion regarding what constitutes a distribution. It’s quite easy for some to confuse the IRA with the LLC, but they are separate entities.
The best way to address this confusion is to pose the following question.
Can the manager of the LLC just write him or herself a check from the LLC account and call it a distribution?
The answer is, unequivocally, “no.” Funds must be distributed from the IRA in order to qualify as a distribution. So, if the IRA doesn’t have enough funds available to make the distribution, funds will need to be sent to your account custodian for deposit. Your custodian would deposit the funds into the IRA and then process a distribution to you, the account holder.
Therefore, if you need to satisfy an RMD, those funds must come directly from the IRA and not directly from the LLC. The distribution rules remain the same no matter your holdings, whether they be traditional assets, alternative assets, single-member LLCs or other investments.
In order to take a distribution of cash from an LLC owned by a Kingdom Trust IRA, you must complete the Single-Member LLC Distribution Request form. Reach out to Client Services for help with this or any other Kingdom Trust document.
For more on IRA distributions, consult IRS Publication 590-B. And for more on the topic of distributions, check out any of the following Kingdom Trust articles: