Can an LLC Really Roll Over a Retirement Plan? – Yes, But Don’t Make This Mistake + FAQs

Over $10 trillion is tucked away in IRAs and 401(k)s across the United States, yet only a small fraction is in self-directed accounts.📊 For example, as of 2020, roughly 3% of IRA assets (about $300 billion) were in self-directed IRAs.

This massive pool of retirement money has entrepreneurs wondering: Can I roll over a retirement plan into my LLC to fund a business or invest in alternative assets? Yes! Tapping your own 401(k) or IRA to fuel a startup or buy real estate without incurring taxes or penalties.

Understanding Retirement Plan Rollovers and LLCs

What is a Rollover? In simple terms, a retirement plan rollover means moving funds from one retirement account to another without triggering taxes. Typically, people roll over a 401(k) from a former employer into an IRA, or move IRA money between custodians. The IRS allows these rollovers to be tax-free as long as you follow the rules (like using eligible accounts and completing the transfer within 60 days if it’s not direct). The main goal is to keep your retirement savings tax-deferred instead of taking a taxable distribution.

Where does an LLC come in? Normally, an LLC (Limited Liability Company) is a business entity, not a retirement account. An LLC by itself cannot be a retirement plan or magically receive a tax-free rollover. However, an LLC can be owned by a retirement account as an investment. This is where the concept of a Self-Directed IRA LLC comes into play. Essentially, you roll over your retirement funds into a self-directed IRA, and that IRA invests in an LLC that you manage. The LLC becomes a vehicle to deploy your retirement money into non-traditional assets (like real estate, private businesses, or cryptocurrencies) while keeping the tax benefits of the IRA.

Key idea: You (as an individual) perform the rollover from your existing retirement plan into a new or existing self-directed retirement account. That account then funds an LLC. The LLC is not receiving the rollover directly; the IRA is. The LLC is simply an investment owned by that IRA. This structure is often nicknamed a “checkbook IRA” because it gives you checkbook control over your retirement funds via the LLC’s bank account.

How an LLC Can Hold Retirement Funds (Self-Directed IRA LLC)

To understand how an LLC can hold retirement plan assets, let’s break down the typical structure step-by-step:

1. Establish a Self-Directed IRA: You need an IRA custodian that allows alternative investments. This could be a Self-Directed Traditional IRA (for pre-tax funds like a 401(k) rollover) or a Self-Directed Roth IRA (for after-tax Roth funds). You open the account with a custodian specializing in self-directed accounts.

2. Roll Over Funds into the Self-Directed IRA: Next, you roll over your existing retirement plan funds into this new self-directed IRA. For example, if you have a 401(k) from a previous employer, you request a direct rollover to the IRA (so the check is made out to the IRA, not to you personally). Likewise, you could transfer an existing Traditional IRA or SEP IRA into the new self-directed IRA. This rollover is done under IRS tax-free rollover rules, meaning no taxes are due as long as it’s executed properly.

3. Form an LLC (Owned by the IRA): Now you create a new LLC, which will be owned by the IRA. The IRA is the sole (or primary) member of the LLC, typically owning 100% of it. For example, if your IRA is named “John Doe IRA”, the LLC’s membership record will show “John Doe IRA” as the owner. You, the IRA holder, usually act as the manager of the LLC, giving you control over investments the LLC makes. The LLC must have an operating agreement that acknowledges the IRA as owner and follows certain IRS-compliant language (to ensure it’s treated as an investment of the IRA).

4. Fund the LLC with IRA Money: The self-directed IRA then invests cash into the LLC – effectively the IRA is purchasing membership units (ownership) of the LLC. For instance, if you rolled $200,000 into the IRA, the IRA can invest that $200,000 into the LLC. This funding is not a taxable distribution; it’s like the IRA buying a stock or mutual fund, except here the asset is your private LLC.

5. “Checkbook Control” – Invest through the LLC: With the IRA-owned LLC funded, you as manager open a bank account in the LLC’s name. The IRA’s money is now sitting in the LLC bank account. From there, you have checkbook control: you can write checks or wire funds from the LLC to make investments on behalf of your retirement account. The range of possible investments is broad – the LLC can purchase real estate properties, invest in a startup company, lend money, buy gold coins, etc. – many things a regular IRA might find difficult or slow to do through a custodian. All investment returns (rent, profits, interest, etc.) go back into the LLC’s bank account (and thus belong to the IRA). If the LLC sells an asset, the proceeds stay in the LLC/IRA, preserving the tax-deferred (or tax-free for Roth) status.

6. Maintain Tax-Deferred Status: Throughout this process, ownership never passed to you personally – it went from one tax-advantaged account to another (e.g., 401k to IRA) and then into an IRA-owned LLC. Because of this, no taxable event was triggered. The LLC’s income is generally treated as the IRA’s investment income. The IRA will eventually tax you (for Traditional funds) only when you take distributions in retirement, just as it normally would. For Roth IRAs, qualified withdrawals remain tax-free.

This self-directed IRA LLC strategy effectively allows your LLC to be funded by retirement dollars. It’s a powerful tool if you want to invest beyond the stock market using your retirement savings. For example, a self-directed IRA LLC is popular for real estate investing: Case Study: Jane rolled over $150,000 from her 401(k) into a self-directed IRA, which invested in an LLC. Jane’s LLC then bought two rental homes. All rent checks and sale profits funnel back into her IRA LLC, growing tax-deferred. By using the LLC, Jane can quickly pay contractors or property expenses by writing a check, without waiting for custodian approval on each transaction.

A Note on Business Start-ups (ROBS) vs. IRA LLCs

What if your goal is to use retirement money to start or buy a business where you actively work? The self-directed IRA LLC has a critical limitation: you (and certain relatives) cannot personally benefit or draw a salary from the IRA’s investments. Running a business that your IRA owns is considered self-dealing (a prohibited transaction, which we’ll discuss later). That’s where a different strategy called Rollovers as Business Start-Ups (ROBS) comes in.

ROBS is a structure that allows you to roll over a 401(k) into a new employer 401(k) plan that invests in your company’s stock. Unlike an IRA LLC, ROBS explicitly permits you to work for the business and draw a salary, because the funds are rolled into a corporate 401(k) which then buys stock in a C-Corporation (making the retirement plan a shareholder of the company). The IRS allows this if done correctly, but it has very specific requirements.

Important: A ROBS requires a C-Corporation. You cannot use a regular LLC or S-Corp for a ROBS because only a C-Corp issues the “qualified employer securities” (stock) that a retirement plan can invest in. In fact, the IRS has stated that an LLC or S-Corp won’t work for ROBS. So if you hear “LLC rollover” in the context of starting a business you’ll run, it usually implies converting that LLC to a C-Corp to implement a ROBS properly.

For the purposes of this article, we focus on the self-directed IRA LLC approach, which is more common for passive investments or where you don’t plan to be an employee of the funded venture. Just keep in mind that if you do need to be actively involved in a business, a ROBS might be the appropriate route (despite involving a corporation instead of an LLC). Below, we’ll explore the tax implications of these strategies and how different types of retirement plans can be rolled over into such structures.

Federal Tax Implications of an LLC Rollover

When rolling over a retirement plan into any self-directed structure (IRA LLC or ROBS), understanding the federal tax rules is crucial. Here’s a breakdown of key tax implications and rules at the federal level:

• Tax-Free Rollovers (Direct vs. Indirect): The IRS allows tax-free rollovers between qualified plans and IRAs. The safest method is a direct rollover (also called a trustee-to-trustee transfer) where the funds go straight from the original plan custodian to the new IRA custodian. In a direct rollover, you never touch the money; it moves via check or wire titled to the new account. This avoids any withholding or risk of mishandling. An indirect rollover (where the check is payable to you and you must deposit it into the new account) is allowable but tricky. You have 60 days to deposit the full amount into the new IRA, or else the IRS treats it as a withdrawal (taxable income plus a 10% early withdrawal penalty if you’re under 59½). Also, with indirect rollovers, the original plan will withhold 20% for taxes, which you must make up out-of-pocket to roll over the full amount (you get the 20% back as a refund at tax time if you rolled everything). Tip: To stay safe, most experts advise using direct rollovers or transfers for moving retirement funds into an IRA LLC structure.

• One Rollover Per Year Rule (IRAs): If you’re moving money between IRAs, be aware of the IRS one-rollover-per-year rule for indirect rollovers. This rule (since 2015) says you can only do one 60-day rollover in any 12-month period across all your IRAs. However, direct transfers between custodians are not counted in this limit and can be done multiple times. This primarily matters if someone tries to do back-to-back short-term rollovers – it’s usually not a factor if you stick to direct rollovers when setting up your LLC.

• No Tax on Proper Rollovers: When done correctly, rolling over a 401(k) or IRA into a self-directed IRA (and then into an LLC investment) does not create a taxable event. You won’t owe federal income tax on the transfer, and you avoid the 10% early withdrawal penalty. The funds maintain their tax-deferred (or Roth) status inside the new account. The IRS essentially views it as moving from one pocket to another within the tax-advantaged system.

• Taxation on Distributions (Later): It’s important to note that a rollover isn’t avoiding tax forever – it’s deferring it. Eventually, when you retire and start taking distributions from the IRA, those will be taxed as ordinary income (for Traditional funds). The LLC structure doesn’t change that fundamental rule. If you rolled over Roth 401(k) money into a Roth IRA LLC, then qualified withdrawals in retirement would be tax-free as usual under Roth rules. Also remember, the IRS requires Required Minimum Distributions (RMDs) from Traditional IRAs (including those with LLCs) starting at a certain age (73 under current law, due to the SECURE 2.0 Act). Make sure you have liquidity in your IRA LLC to take those RMDs, otherwise you could face a 25% excise penalty for missing an RMD.

• Unrelated Business Income Tax (UBIT): Holding retirement funds in an LLC can trigger a special tax if the LLC earns certain types of income. IRAs are tax-exempt entities, but if an IRA (through an LLC) invests in an active business or uses leverage (debt), it may owe Unrelated Business Income Tax (UBIT). For example, if your IRA LLC operates a trade or business (e.g., flipping houses frequently, running a store, or a tech startup investment that allocates business income to the IRA), that income can be treated as unrelated business taxable income because it’s income from a business operated by a tax-exempt entity. Similarly, if your IRA LLC buys real estate with a mortgage, the rental income attributable to the debt-financing is considered Unrelated Debt-Financed Income (UDFI), which is subject to UBIT. UBIT is taxed at trust tax rates – which hit the top 37% rate at a very low income threshold (just over $15,000 of such income can reach the top bracket in 2025). The IRA would need to file a Form 990-T and pay this tax from IRA funds. Key point: UBIT doesn’t negate the benefits of an IRA LLC, but you should be aware that not all income inside an IRA is automatically tax-free. Passive investment income (rent, interest, dividends, capital gains) remains tax-deferred, but active business income or leveraged income might be taxed currently via UBIT.

• Prohibited Transactions – Tax Consequences: Perhaps the most serious federal tax pitfall is engaging in a prohibited transaction with your IRA LLC. The IRS has strict rules (Internal Revenue Code §4975) barring certain transactions between your IRA and “disqualified persons” (which include you, your spouse, your children/parents, etc. – basically close family and any entities you control). If you violate these rules, the penalty is draconian: your entire IRA can be disqualified. That means it’s deemed distributed as of the first day of that year, and you owe income tax on the full IRA value (plus a 10% penalty if under 59½). For instance, if your IRA LLC buys a beach condo and you or your kids vacation in it, that’s a prohibited personal benefit. The IRS could disqualify the IRA – you’d have to add the whole value of the IRA to your taxable income that year. Similarly, if your IRA LLC lends money to your son, or buys stock in a company you 50% own, those are prohibited transactions. The tax implications of mistakes here are huge, essentially turning a tax-deferred rollover into a worst-case taxable event. We’ll cover more examples of these pitfalls later, but from a tax perspective, avoid prohibited transactions at all costs to preserve the tax-advantaged status of your rolled-over funds.

• ROBS Tax Considerations: In a ROBS arrangement (using a C-Corp and 401k plan), the initial rollover to the new 401k and purchase of stock is tax-free as well. However, ongoing tax implications differ: the C-Corporation is a taxable entity (it will pay corporate income tax on profits, since it’s C-corp), but your 401k’s ownership of the stock doesn’t by itself cause tax to you personally. When you eventually take distributions from the 401k in retirement, those are taxed normally. The risk on the tax side is again if the arrangement fails to meet IRS rules – the IRS could disqualify the 401k plan if it finds the ROBS was abusive (for example, not offering benefits to employees or only benefiting the owner). If disqualified, that would make the rollover taxable. Another consideration: if the corporation pays you a salary (which it likely will, since you work for the business), that salary is just W-2 income taxable to you like any job. That’s expected and not a penalty – just part of operating the business.

In summary, under federal law, an LLC cannot simply receive your 401(k) funds directly, but through a self-directed IRA or qualified plan rollover, you can deploy retirement assets into an LLC without immediate tax. The key is following IRS rollover rules to the letter and steering clear of transactions that jeopardize the account’s tax-favored status. Next, we’ll consider state-level tax implications and legal nuances, which can also influence how you structure such rollovers.

State Tax Implications and Legal Nuances

U.S. federal law governs the tax-deferred status of retirement accounts nationwide, but individual states can have their own tax rules and legal considerations for retirement plan rollovers and LLCs. Here’s what to keep in mind at the state level:

• State Income Tax on Rollovers: The good news is that states generally mirror federal treatment for qualified rollovers. If your rollover is tax-free at the federal level, states do not tax it either. You won’t owe state income tax for moving your 401(k) into an IRA LLC. However, if a rollover is done incorrectly and counted as a distribution federally, it will usually count as taxable income under state law too (for states with income tax). In short, a proper rollover incurs no state income tax, just as it avoids federal tax.

• State Tax on Retirement Distributions: Eventually, when you take money out of the retirement account in retirement, state taxes may apply. This isn’t unique to the LLC scenario, but worth noting. Some states (like Florida, Texas, etc.) have no income tax, meaning your IRA withdrawals would be free from state tax. Other states do tax retirement income, though a few offer exemptions or exclusions for pension or IRA income up to certain amounts or for seniors. Be aware of your own state’s stance—rolling into an IRA LLC doesn’t change how distributions to you will be taxed by your state later on.

• UBIT at the State Level: If your IRA LLC triggers Unrelated Business Income Tax federally, you might also owe state-level UBIT equivalent taxes in states that have an income tax. Many states tax corporate or trust income similarly to federal rules. For example, if your IRA LLC owns an apartment complex in California with a mortgage, not only would the IRA potentially owe federal UBIT on the rental income attributable to leverage, but California would likely expect a state income tax return and tax on that portion as well (since California taxes trust income and doesn’t exempt IRA UBIT). Each state has its own tax forms for trusts or LLCs, but typically, the IRA (as an entity) might need to file a state tax return if it has income from business activities in that state. The specifics can get complex, so a local tax advisor is useful if your IRA LLC operates in a high-tax state.

• State LLC Fees and Franchise Taxes: Forming an LLC involves state-level fees, and some states impose annual taxes or franchise fees on LLCs that operate there. These costs apply to all LLCs, including those owned by an IRA. For instance, California charges an $800 annual franchise tax on LLCs doing business in the state (plus an additional fee for LLCs with income above a threshold). If your self-directed IRA LLC is formed in or transacting business in California, it must pay that $800 each year – an expense that will essentially come out of your IRA funds. Other examples: Delaware and Nevada have annual business license fees and reports, though smaller; Texas has a franchise tax (margin tax) but small businesses or purely investment LLCs often fall under the no-tax threshold; Florida has an annual report fee. When planning your IRA LLC, consider the state’s LLC costs. Some people choose to form the LLC in a state with low fees (like Wyoming) especially if investing in intangible assets or various locations. But if the LLC will own physical real estate or a business in a particular state, you usually must register the LLC in that state anyway (as a foreign LLC) and pay that state’s fees. Bottom line: state fees and requirements still apply – factor those into your decision on where and how to set up the LLC.

• State Securities and ROBS Nuances: If you pursue a ROBS with a C-Corp, note that while federal law governs the qualified plan, you’re essentially issuing stock to your 401(k). Some states might have securities notice requirements even for private stock issuance, though generally ROBS transactions are internal and not public offerings so state securities laws (Blue Sky laws) are not a big issue. Still, ensure your corporate stock issuance complies with any state corporate filing requirements.

• Legal Interpretation of Single-Member LLCs: An IRA LLC is often a single-member LLC (the sole member being one IRA, or sometimes multiple IRAs of the same person or spouses). Most states treat single-member LLCs similarly to multi-member LLCs in terms of liability protection, but a few have differences in creditor treatment. For example, in some states a creditor of the single member (in this case, the IRA) might be able to access LLC assets more easily than if there were multiple members, due to charging order laws. Why does this matter? Suppose your IRA LLC is involved in a lawsuit (maybe a tenant got injured on a rental property). If the LLC is sued, normally the IRA’s exposure is limited to what’s in the LLC. If you personally are sued (outside the IRA context) and someone tries to get at your IRA LLC, they generally cannot because your IRA is a separate legal owner and IRAs have certain creditor protections (especially in bankruptcy, up to about $1–$1.5 million under federal law). State laws also often protect IRAs from creditors outside of bankruptcy. However, the LLC itself doesn’t give the IRA extra shielding beyond that. It’s a complex area, but ensure you understand your state’s asset protection laws for IRAs and LLCs. For instance, some IRA owners add a second IRA as a small co-member in the LLC to make it multi-member, aiming for stronger charging order protection – this is a nuanced legal strategy beyond our scope, but it shows how state LLC law can come into play.

• State Reporting and Compliance: Remember that having an LLC means you may have to file annual reports with the state, maintain a registered agent, and keep the LLC in good standing. None of that is waived just because the LLC is owned by an IRA. If you fail to maintain the LLC properly under state law, it could be administratively dissolved – which could be a mess for your IRA assets. So, part of the deal in an IRA LLC rollover is taking on the administrative responsibilities of an LLC at the state level (paying fees, filing any required statements of information, etc.).

In essence, state considerations for an LLC rollover are twofold: tax and compliance. Tax-wise, do what you normally would for any retirement plan – avoid distributions that would be taxable in your state, and be mindful of any state taxes if your IRA LLC earns active income. Compliance-wise, treat the LLC like a business entity that needs care and feeding in its jurisdiction. By addressing both, you ensure your self-directed structure remains robust and in line with both federal and state laws.

How Different Retirement Plans Handle LLC Rollovers

Not all retirement accounts are created equal when it comes to rollover rules. The ability to roll funds into a self-directed IRA LLC depends on the type of account and your personal circumstances. Let’s break down various retirement plans and their eligibility for these LLC rollover strategies:

401(k) Plans (and Other Employer Plans like 403(b), 457)

Can you roll over a 401(k) into an IRA LLC? Yes – if you’re eligible for a rollover. Generally, you must no longer be with the employer that sponsored the 401(k) to roll it over into an IRA. When you leave a job (whether by changing jobs or retirement), your former employer’s 401(k) can typically be rolled into an IRA of your choice. This is often called a 401(k) rollover. Those funds, once in a Traditional IRA, can be directed into your self-directed IRA LLC as described earlier.

If you have a 403(b) or 457(b) plan (common for nonprofit and government workers), the rules are similar: upon leaving the employer, you can roll those into an IRA. The IRS calls these “eligible rollover distributions.” So a teacher’s 403(b) or a city employee’s 457 can become IRA money and then fund an LLC.

What if I’m still with the employer? If you’re still working at the company that has your 401(k), you are more limited. Most 401(k) plans do not allow you to roll out money while you’re still employed, unless you meet certain conditions:

• If you’re over 59½, many plans allow an in-service rollover, meaning you can roll over a portion of your 401(k) to an IRA even while working, because you’ve reached retirement age threshold.
• Some plans have a provision that allows in-service rollovers of certain contributions (like after-tax contributions or employer match) after a number of years or other qualifying events. This varies plan to plan.
• If you really want to use current 401(k) funds for self-directed purposes and can’t roll them out, one strategy is to see if your plan offers a self-directed brokerage window (some 401k plans let you invest in a brokerage account where you might have more options, though rarely as much freedom as an IRA LLC). If not, you may be stuck until leaving that job.

Special case – Solo 401(k): If your LLC is a small business with no full-time employees other than owners, you might set up a Solo 401(k) for yourself instead of an IRA. A Solo 401(k) can accept rollovers from other plans and can be self-directed to invest in alternatives much like an IRA LLC (the Solo 401k can even directly hold real estate or notes). Solo 401(k)s have the advantage of no custodian needed for investing and no UBIT on leveraged real estate (they are exempt from UDFI rules). However, they come with their own paperwork (Form 5500 filing when assets > $250k) and are beyond the scope here. Just note that as an LLC business owner, a Solo 401k is an alternative path to self-direction besides an IRA rollover. But if you have employees, a Solo 401k is not available – an IRA LLC might be more feasible for broad investment flexibility.

Summary for 401(k)s: A 401(k) can indeed be rolled into a self-directed IRA LLC once you have a distributable event (leaving the job, or reaching eligible age). Most people doing this are rolling over an old 401(k) from a previous employer. It’s a common scenario: you change jobs and have, say, $100k in your old employer’s 401k. You decide to roll it to a self-directed IRA, form an LLC, and use the money to invest in a franchise or some venture. This is perfectly allowed by IRS rules as long as the rollover goes into a proper IRA first. Always initiate the rollover directly to avoid any withholding issues.

SEP IRAs (Simplified Employee Pension Plans)

A SEP IRA is essentially a Traditional IRA with higher contribution limits for small business owners or self-employed individuals. If you have a SEP IRA (perhaps through your LLC or self-employment), the funds in it are treated like any other Traditional IRA funds when it comes to rollovers.

• Rollover Eligibility: You can generally transfer or roll a SEP IRA into another Traditional IRA at any time. There’s no separation-from-service issue because it’s your own IRA. So yes, you can roll a SEP IRA over into a self-directed IRA LLC structure quite easily. In practice, since a SEP is just an IRA, you might simply convert the existing account with your custodian to a self-directed account or do a trustee-to-trustee transfer to a new self-directed custodian. This is a non-taxable transfer.

• Ongoing Contributions: Keep in mind, a SEP IRA allows your business to continue making contributions each year (up to 25% of compensation or a max of $66,000 in 2023, for example). If you fully move a SEP IRA into an LLC structure, you’d still make contributions into the IRA (with the custodian) and then you could contribute that to the LLC as an additional investment from the IRA. It adds a small layer of complexity, but it’s doable – the IRA would just incrementally purchase more units of the LLC with each contribution made. Ensure your custodian and operating agreement allow for that, or you can periodically transfer new contributions into the LLC.

• Same Tax Treatment: Rolling over or transferring a SEP IRA to an IRA LLC does not change its tax-deferred nature. The same rules about distributions and RMDs apply as with any Traditional IRA.

In short, SEP IRAs are fully eligible for rollovers into an IRA LLC. Think of a SEP IRA as just a big Traditional IRA piggybank – you can self-direct those funds the same way. Just be cautious to keep the IRA custodian in the loop for any new contributions or valuations if required.

SIMPLE IRAs (Savings Incentive Match Plan for Employees)

SIMPLE IRAs are another type of employer-sponsored IRA for small businesses, but they come with a big caveat: the two-year rule. This rule uniquely affects rollover ability:

• Two-Year Waiting Period: If you have participated in a SIMPLE IRA plan, you must wait at least 2 years from the date you first joined the SIMPLE IRA (essentially from the first contribution made to your SIMPLE) before you can roll those funds into any other type of retirement plan. During this two-year window, the ONLY rollover allowed is to another SIMPLE IRA. If you violate this (i.e., roll a SIMPLE IRA into a Traditional IRA or 401k before two years are up), the IRS treats it as a withdrawal – meaning it becomes taxable and if you’re under 59½, subject to a 25% early penalty (note: 25% for SIMPLE early distributions, instead of the normal 10%). That’s a costly mistake.

• Rollover After 2 Years: Once the two years have passed, a SIMPLE IRA essentially turns into a pumpkin… or rather, into a normal IRA. At that point, you can roll it over or transfer it into a Traditional IRA or another plan freely, without special penalties. So to use an IRA LLC with SIMPLE funds, you’ll need to be patient if you’re still within that initial period. After two years, you could transfer the SIMPLE IRA money to a self-directed IRA and proceed with the LLC investment structure like any other IRA money. Or you could possibly re-designate the SIMPLE IRA as a Traditional IRA with the custodian after two years.

• Ongoing Contributions vs. Rollover: If you are still making contributions to a SIMPLE IRA (say your LLC has a SIMPLE IRA plan for you and maybe employees), consider timing. Some people keep their SIMPLE IRA for contributions and only roll out older funds after the window, or if closing the SIMPLE plan entirely. Note you cannot contribute new money to a Traditional self-directed IRA beyond annual limits ($6,500 or so) – so if you want to keep using the SIMPLE for high contributions (up to $15,500 plus employer match in 2023), you might not want to terminate it. But you can transfer out prior balances after 2 years even while continuing the plan for new contributions, depending on plan rules. Coordination with a financial advisor is wise here.

Summary for SIMPLE: It is possible to roll a SIMPLE IRA into an LLC structure, but only after you’ve met the 2-year participation requirement. After that, the SIMPLE funds can be treated like Traditional IRA funds. Until then, you’re effectively locked in. Always check your start date on the SIMPLE IRA before attempting any rollover. Once eligible, do a direct trustee transfer to avoid any withholding.

Traditional IRAs and Roth IRAs

Regular Traditional IRAs are the easiest to convert into a self-directed IRA LLC because by nature they’re already IRAs:

• Traditional IRA: You don’t even have to “roll over” in the technical sense if it’s already an IRA. You can simply do a custodian-to-custodian transfer from your current IRA provider to a self-directed IRA custodian. This isn’t reported as a rollover or distribution at all; it’s just moving IRA money. From there, that new IRA invests in the LLC as we outlined. Every major self-directed IRA custodian handles these transfers routinely. There’s no tax, no limit on how many transfers, and no waiting period. If you have multiple Traditional IRAs, you could even consolidate them and then do one LLC investment, or have multiple IRA owners invest into one LLC (this is possible but complex regarding operating agreement shares – e.g., you and your spouse’s IRAs co-invest into one LLC). Note: If you co-invest multiple IRAs or IRA and personal funds, be extremely careful – that can raise prohibited transaction flags if not done right. Most folks keep it simple: one IRA = one LLC.

• Roth IRA: A Roth IRA can also be self-directed with an LLC (commonly called a Self-Directed Roth IRA LLC). The mechanics are the same, but the funds are after-tax. You cannot roll a Traditional 401k directly into a Roth IRA LLC without a conversion – that would trigger taxes since it’s a different tax character. Usually, one rolls a 401k into a Traditional IRA first, or a Roth 401k into a Roth IRA. If you want to use Roth dollars, make sure to roll like-to-like (pre-tax to pre-tax, Roth to Roth) or be prepared for a conversion tax. The beauty of a Roth IRA LLC is that all the growth and eventual distributions can be tax-free, as long as you follow Roth rules (e.g. five-year aging and reaching 59½ for qualified withdrawal). Roth IRAs also have no RMDs in your lifetime, so you could keep the Roth IRA LLC growing untapped far longer.

• Inherited IRAs: Briefly, if you have an inherited IRA, be cautious. You technically can self-direct an inherited IRA as well (via a custodian that allows it and an LLC). But inherited IRAs have strict distribution requirements (the new 10-year rule or life expectancy payouts depending on when inherited). Any LLC structure must accommodate taking those required distributions. Plus, an inherited IRA cannot be mixed or rolled into your own IRA – it has to stay separate. It’s an advanced move to do an IRA LLC with an inherited IRA, and professional guidance is a must.

Eligibility Recap with a Table: To summarize which plans can roll into a self-directed IRA LLC, here’s a quick reference table:

(This table assumes the individual has the ability to roll funds out; always check plan rules.)

As you can see, most retirement plans can eventually funnel into an IRA LLC structure, with timing being the main factor. Always confirm with the plan administrator that your funds are eligible for rollover. It’s wise to consult with a tax advisor or plan custodian when in doubt, because reversing an ineligible rollover (if you weren’t supposed to take one) can be difficult.

Common Pitfalls and Legal Restrictions to Avoid

While the idea of using an LLC for your retirement funds is attractive, there are several common pitfalls and legal traps to be aware of. Running afoul of IRS rules or other regulations can turn your great strategy into a costly mistake. Here we detail the major things businesses and account holders should avoid:

• Prohibited Transactions (Self-Dealing): This is the #1 hazard in self-directed IRA LLCs. A prohibited transaction occurs when your IRA engages in certain dealings with you or other “disqualified persons.” Disqualified persons include: you as the IRA owner, your spouse, your children, grandchildren and their spouses, your parents and grandparents, and any entities those persons control (like businesses you own 50% or more of). Also, any fiduciary of the IRA (which includes you as manager) is disqualified. Practically, this means your IRA LLC cannot buy from, sell to, or lend money to any of those people, nor can it provide any of them a benefit. Examples of prohibited self-dealing:

  • Your IRA LLC purchases a rental property from your brother – prohibited (brother is disqualified).
  • Your IRA LLC rents an apartment to your child – prohibited (even at market rent, your child is disqualified).
  • Your IRA LLC lends money to your own LLC business that you personally own – prohibited (you and your entities are disqualified).
  • You use IRA LLC funds to pay yourself a salary or compensation for managing the investments – prohibited. (You can be the manager, but you must do it without compensation, aside from the eventual IRA growth to benefit you at retirement.)
  • You personally guarantee a loan for the IRA LLC (like co-sign a mortgage or pledge personal assets) – prohibited, because you’re extending credit to your IRA.
  • The IRA LLC buys a vacation home and you or your family stay in it for a weekend – prohibited, as that’s personal benefit from an IRA asset.

  The IRS takes prohibited transactions very seriously. For instance, in Peek v. Commissioner (2013), two taxpayers had their IRAs buy a business and personally guaranteed the business loans; the Tax Court ruled this personal guarantee was a prohibited transaction, disqualifying their IRAs and leaving them with a hefty tax bill. In another case, Ellis v. Commissioner (2013), a taxpayer’s IRA LLC paid him a salary as manager – the court held that this violated the rules, blowing up his IRA (all $300k+ became taxable income). Avoiding even the appearance of self-dealing is critical. When in doubt, don’t do a transaction between your IRA LLC and yourself or close family. Keep it purely arm’s length.

• Exclusive Benefit Rule: By law, your retirement plan must operate for the exclusive benefit of the plan (you in your golden years, essentially). Any current benefit to you is not allowed. For example, if your IRA LLC buys a piece of land and you personally use it now (even if you plan to pay fair rent later), that current benefit taints the account. The exclusive benefit rule is basically what the prohibited transaction rules enforce. So always ask: Does this action benefit me (or family) now, or only the IRA in the future? If it’s now, it’s likely not allowed.

• Operating a Business in IRA LLC: As mentioned, an IRA LLC should generally invest passively. If it starts running an active business where you’re essentially acting as the operator, it’s both a UBIT issue and a potential prohibited transaction if you provide uncompensated labor that goes beyond minimal management. The IRS hasn’t explicitly outlawed sweat equity in an IRA, but if you’re effectively working full-time in an IRA-owned business without pay, that’s a grey area (could be seen as a contribution of services to the IRA, which is not a listed prohibited transaction per se, but it’s risky). Most experts say: Don’t run a business that needs your day-to-day involvement inside your IRA LLC. If you want to run a business, consider ROBS instead.

• ROBS Compliance Missteps: If you take the ROBS route (with a C-Corp and 401k plan), be aware of pitfalls there too:

  • The new 401k plan must be a qualified plan and follow all rules (nondiscrimination, covering eligible employees, not just you). If you hire employees in your business, you have to offer them the 401k after they meet eligibility, and possibly contribute for them if you have a match or profit share. Failing to properly administer the plan can disqualify it.
  • You must actually be an employee of the new C-Corp and draw a reasonable salary for ROBS to be in good standing. If you set it up and don’t pay yourself when the business has revenue, the IRS might see it as a ruse.
  • Don’t mix personal cash into the ROBS-funded corporation without careful accounting. It can be done (you can co-fund a business with some personal money and some 401k money) but it must be for stock at fair valuation to avoid prohibited transactions (your personal and plan ownership percentages must reflect contributions).
  • Watch out for double taxation on exit: A C-Corp’s growth, when eventually sold, will first be taxed at the corporate level if assets are sold, then again when distributing to the 401k or to you. However, if the 401k holds stock and you sell the stock, the 401k gets the proceeds and that’s not a corporate-level tax event – the tax comes later as you withdraw from the 401k. Plan your exit strategy with a CPA to minimize taxes.
  • Keep up with required filings: The 401k plan needs to file Form 5500 annually if it has assets over $250k or any employees; the corporation files corporate tax returns. Neglecting these can raise red flags.

• Lack of Documentation or Formalities: Treat your self-directed IRA LLC like a real separate entity. That means:

  • Have a proper operating agreement that names the IRA as owner and outlines the rules (many IRA custodians provide an approved template).
  • Get an EIN for the LLC (even though it’s a disregarded entity for tax, an EIN is needed for bank accounts and any filings).
  • Do not commingle IRA LLC funds with personal funds. The LLC should have its own bank account, and only IRA money goes in or out (no dipping in for personal expenses, even temporarily).
  • Sign contracts/investments in the name of the LLC, not yourself. For example, if the LLC is “Sunrise Investments LLC”, you sign “Sunrise Investments LLC, by [Your Name], Manager”. This shows you’re acting on behalf of the IRA’s LLC, not personally.
  • If the IRA LLC needs more capital, you can’t just deposit your personal money into it. That would be a contribution to the IRA (which is limited annually) or a prohibited transaction if beyond limits. Instead, contributions must flow through the IRA custodian. Many prohibited transactions occur through sloppy execution – like accidentally paying an LLC expense from a personal account, or vice versa. Always keep it strictly separated.

• Overpaying or Underpaying for Assets: The IRA LLC cannot buy assets for more than fair market value or sell for less than fair value to a disqualified person. While buying from unrelated parties at market price is fine, sometimes people get emotional about an investment and might pay more than it’s worth (especially if it involves a friend’s business). Overpaying could be seen as a way of moving value to that other party (if they’re disqualified, it’s a problem; if not, it’s just a bad investment but not illegal). Underpaying to help someone (like selling an IRA asset cheap to your kid) is definitely prohibited. Always transact at fair market values, and document valuations for non-public assets.

• Failure to Consider Exit Strategy: One pitfall is not planning how you’ll eventually wind down the IRA LLC. For example, say your IRA LLC invested in a very illiquid asset (a 10-year limited partnership or a property that’s hard to sell) and now you reach age 73 and must take RMDs (Required Minimum Distributions). If all your money is tied up, you might scramble to find cash to distribute or have to distribute the asset itself (which is complex, as that would require valuation and perhaps partial ownership transfer out of the IRA). Plan ahead: either keep some cash or liquid assets in the IRA to satisfy RMDs, or have a strategy to start selling assets when needed. Also, when you eventually want to close the IRA LLC (maybe in retirement you want simplicity), you’ll need to either distribute the LLC (which would make all its assets effectively distributed to you, triggering tax on a Traditional IRA) or sell the assets and distribute cash. It’s all doable, just not to be ignored until the last minute.

• Not Seeking Professional Advice: The self-directed IRA LLC arrangement crosses multiple domains: tax law, ERISA law (for prohibited transactions), corporate law (LLC formation), and sometimes real estate or securities law. It’s easy to trip up if you go it alone without understanding all angles. A common mistake is assuming something is allowed because “it’s my money, I should be able to do what I want.” In reality, once money is in a retirement account, it’s under a different set of rules. Consulting an attorney or CPA who specializes in self-directed IRAs before doing unusual transactions can save you from irreversible errors. Also, keep communication with your IRA custodian – they often require you to certify that investments are not prohibited. If they flag something, heed the warning.

• State Law Pitfalls: As discussed, failing to pay an LLC’s state fees or register properly in the state where it’s doing business is a pitfall. For example, if your IRA LLC owns a rental property in New York but you never registered the LLC in NY (because you formed it in Wyoming to save fees), you could face penalties and inability to use the courts to evict tenants, etc., until you back-register and pay back fees. State tax authorities could also come knocking if they see unregistered business activity. So avoid the mistake of ignoring state compliance to save a few bucks; it’s not worth it.

By navigating these pitfalls with care, businesses and investors can successfully use LLCs in conjunction with retirement plans. Many people do this right and enjoy the benefits of a more diverse retirement portfolio or capital for a new venture. The key is to always remember you’re dealing with regulated retirement money – keep it compliant, and you’ll reap the rewards down the line.

Conclusion

Rolling over a retirement plan into an LLC structure is indeed possible, but it’s a nuanced process that blends retirement law with business law. In summary, an LLC itself cannot “own” your IRA or 401(k) in the traditional sense, but your IRA or 401(k) can own an LLC as an investment – allowing you to direct your nest egg into ventures of your choosing. Self-directed IRA LLCs offer a powerful form of financial freedom, putting you in the driver’s seat of your retirement investments, from real estate deals to private startups. On the flip side, that freedom comes with responsibility: the IRS rules and tax implications require careful navigation.

At the federal level, a properly executed rollover keeps Uncle Sam’s hands off your money for now, preserving its tax-advantaged growth. At the state level, compliance and local taxes add another layer to manage, but usually mirror the federal approach for genuine rollovers. Various retirement plans have different hoops to jump through (think 401(k) job changes or SIMPLE IRA waiting periods), but nearly all roads can eventually lead to Rome – or rather, to a self-directed IRA LLC – if you follow the rules and timelines.

For business owners, the allure of tapping into retirement funds to fuel a business is strong. Just remember the distinction: passive investment via IRA LLC (no personal benefit until retirement) vs. active business funding via ROBS (allowing you to draw a salary but requiring a C-Corp). Choose the path that fits your goals, and always adhere to the legal guardrails.

By breaking down definitions, examining case studies, and comparing strategies, we’ve explored the rich landscape of LLC rollovers. Armed with this knowledge, you can approach the idea with both excitement and caution. The retirement capital you’ve built can work double duty – securing your future while empowering your present ambitions – as long as it’s structured correctly. As with any complex financial move, due diligence and expert advice are your allies. Now, let’s address some frequently asked questions to solidify the key points.

FAQ

Q: Can my LLC directly receive my 401(k) or IRA funds without taxes?
A: No. You must first roll funds into a self-directed retirement account, which can then invest in your LLC. Done correctly, it’s tax-free until you withdraw money personally.

Q: Is it legal to use a self-directed IRA LLC for investing?
A: Yes. The IRS allows IRAs to invest in LLCs and alternative assets. It’s legal as long as you avoid prohibited transactions (no self-dealing or personal benefits from those investments).

Q: What retirement accounts can be rolled into an IRA LLC?
A: Eligible accounts include 401(k), 403(b), 457 plans (after leaving the job), Traditional IRAs, SEP IRAs, Roth IRAs (to Roth IRA LLC), and SIMPLE IRAs (after 2 years). Most tax-deferred plans qualify.

Q: Are there tax penalties for rolling over my retirement plan into an LLC structure?
A: Not if done properly. A direct rollover from a plan to an IRA is tax-free. If you mess up (e.g., miss the 60-day window on an indirect rollover), it becomes a taxable distribution with potential penalties.

Q: What is a prohibited transaction in the context of an IRA LLC?
A: It’s a transaction between the IRA/LLC and a disqualified person (like you or family) that the IRS forbids. Examples: you personally using IRA-owned assets, or the IRA lending money to your relatives. Such actions can disqualify the IRA.

Q: Can I pay myself a salary or fee for managing my IRA-owned LLC?
A: No. As the IRA owner, you cannot receive current compensation or benefits from the IRA’s investments. Managing your IRA LLC must be done as an uncompensated fiduciary duty to avoid self-dealing.

Q: How does a ROBS differ from a self-directed IRA LLC?
A: A ROBS involves rolling a 401(k) into a new 401k plan that buys stock in a C-Corp (letting you work in the business). An IRA LLC is an IRA investing in an LLC, and you can’t personally work for or benefit from that LLC until retirement.

Q: Do state taxes affect my self-directed IRA LLC?
A: Generally, no state tax on the rollover or on IRA investment growth. But your LLC must comply with state business taxes/fees, and eventual IRA withdrawals may be subject to state income tax if your state has one.

Q: What is UBIT and should I worry about it?
A: UBIT (Unrelated Business Income Tax) applies if your IRA LLC earns active business income or income from debt-financed investments. It’s a special tax the IRA must pay. You should plan for it if your IRA LLC will run a business or use loans.

Q: Is using retirement funds for my business a good idea?
A: It can be, but it’s risky. You’re putting your nest egg on the line. Ensure the business plan is sound. Follow all rules (ROBS or IRA LLC). And consult professionals to weigh the long-term impact on your retirement security.