Self-directed IRA- 25% rule

[B21]

I have a client who is In the process of establishing an LLC as an investment vehicle for self-directed IRAs.  I'm aware of the 25% rule that would cause funds transferred to the LLC to be considered as "plan assets" & subject to the prohibited transaction regulations if the aggregate equity in the LLC held by all IRAs exceeds 25%. Assuming the LLC does not satisfy the 25% rule exemptions.

My question is does a prohibited transaction occur at the time an IRA accountholder purchases equity in the LLC (IRA equity exceeds 25%) or does a potential prohibited transaction occur based on the use of the funds once invested?

 

[Luke Bailey]

B21, the latter, if I understand your question. Assuming the IRA is the original (and, it sounds like) only investor in the LLC, which it sounds like will hold plan assets under DOL reg, that (i.e., the IRA's formation of brand new LLC and capitalizing it) is not a PT. It is what the LLC (i.e., really, the IRA, since the LLC will hold plan assets) does with it's capital that could be a PT, the same as if the transaction engaged in by the LLC were engaged in by the IRA directly, since the LLC will hold plan assets.