Can you put an LLC in an IRA? Yes. It is legal. But doing so opens the door to a variety of potential missteps which could result, among other things, in your IRA losing its tax-deferred status. If an IRA owner is not very meticulous in handling the LLC’s transactions, problems are going to follow.
This risk is considered high enough that many IRA custodians refuse to allow LLCs in accounts they oversee, in spite of them being technically permissible.
At issue is the fact that all of the assets of an IRA are supposed to work for the benefit of the IRA, and not the owner of the IRA. This may seem like a subtle difference, but it’s an important one. An IRA is treated as a de facto trust for purposes of keeping it distinct from the owner of the IRA. So if the owner of the IRA in any way benefits from the IRA’s LLC, that is going to constitute a prohibited transaction.
The desire to have an LLC in an IRA usually arises when someone wants to invest in something which has an operating component, such as income producing real estate or a business (in which neither the IRA owner nor his/her family works in exchange for pay). These types of investments often have a need for ongoing check writing and administration, and it is logistically easier to do this with a regular bank account than having to go through the custodian every time a check is needed. An LLC is a neat and clean way to accomplish that goal. So there are legitimate reasons to do it, and if one properly observes the formalities everything is usually fine.
It’s just that that last part is a big if. Investors wishing to go this route should have a thorough discussion with their tax accountant and also find an IRA custodian that is comfortable with this type of arrangement. Note that this is a case where a single screw-up could lead to the whole IRA being deemed to have been distributed. So you could owe taxes on 100% of the balance, as well as a penalty for early distribution if you are younger than 59 ½. Tread lightly.