Self-Directed IRAs follow most of the same exact rules of your average Traditional or Roth IRA, with some exceptions. Please consult your tax advisor, tax attorney, or CPA before engaging in any transaction. Rocket Dollar is not a tax advisor.
How is a Self-Directed IRA at Rocket Dollar set up to give it a tax-advantaged structure?
With an IRA LLC, the IRA is the single member of a manager-managed limited liability company (LLC). When the LLC was established by the formation documents with the state, the IRA became a single member. As such, there was no prohibited transaction. The account owner becomes the manager of the LLC and can make investment decisions and handle the myriad administrative tasks for the IRA and the LLC. This is a unique structure that can bring more questions than the normal rules of contributions, taxes, and distributions of the stocks and bonds Traditional or Roth IRA you are used to.
What tax documents am I going to get from Rocket Dollar?
For an IRA, you will receive a copy of Form 5498 filed by Rocket Dollar’s partner custodian after it is filed with the IRS. You should receive this within a month after the tax filing deadline. You do not need to do anything with this form except keep a copy of it for your records. You do not need Form 5498 to file your individual tax return, but we advise you to give your CPA a copy of your Form 5498. Form 5498 is the Fair Market Value (FMV) of your IRA, needed for every IRA in America. You can read more on it here. In order to help us to report on your IRA accurately, please make sure you cooperate with our team and look out for notices on reporting your FMV near the end of the calendar year, in November and December.
Do I have to file taxes for my IRA LLC?
Typically, no. The IRA LLC is an Individual Retirement Arrangement account and is tax-exempt. There’s one exception: if your IRA or IRA LLC engages in a business activity that generates active or earned income, you may have generated Unrelated Business Taxable Income (UBTI) and your IRA or IRA LLC may owe Unrelated Business Income Tax (UBIT). If so, you will need to file a tax return for the IRA or IRA LLC. The tax return is Form 990-T. You will need to consult with a CPA or tax professional to file this tax return. Rocket Dollar is not responsible for filing any 990-T returns.
Rocket Dollar sets my LLC to Colorado...Do I have to file taxes in the state of Colorado now too?
Typically, no. The IRA LLC is an Individual Retirement Arrangement account and is tax-exempt. There’s one exception: if your IRA or IRA LLC engages in a business activity that generates active or earned income, you may have generated Unrelated Business Taxable Income (UBTI) and your IRA or IRA LLC may owe Unrelated Business Income Tax (UBIT). If so, you will need to file a tax return for the IRA or IRA LLC. The tax return is Form 990-T. If you’re filing form 990-T, it’s likely you need to file a Corporate Tax return in the state of Colorado also, assuming you’re using a Colorado LLC. See guidance from the Colorado Department of Revenue, Taxation Division. You will need to consult with a CPA or tax professional to file these tax returns. Rocket Dollar is not responsible for filing any 990-T returns or state tax forms for IRAs or IRA LLCs.
If you need assistance completing Form 990-T, or your CPA is not familiar with it, Rocket Dollar cannot help directly but can suggest a CPA has this expertise.
If I own real estate in an IRA, am I shielded from federal, state, and local taxes?
Remember, with an IRA or IRA LLC, the IRA or IRA LLC owns the real estate, not you personally. The IRA or IRA LLC is responsible for paying local property taxes. Typically, IRAs are exempt from federal and state taxes. If you’re generating UBTI, it could be best to contact a CPA, or we can refer you to one.
What are UBIT and UDFI?
UBIT is an unrealized business income tax. This is a tax to make sure "charities" or retirement accounts cannot avoid paying taxes in areas the IRS feels like they should pay... or hide taxable business activity in activities like a retirement account or charity that makes it hard to find.
It is more likely to hit active investments rather than passive investments. UDFI, unrealized Unrelated Debt-Financed Income, is most likely to hit those that take a non-recourse loan financing against an asset in their IRA. The most common example is a person who wants to buy a Single Family or Multifamily residence but takes out a non-recourse loan to help with the financing.
I have specific tax questions related to my Self-Directed IRA... is there an expert I can talk to?
Rocket Dollar cannot help directly with your taxes or advanced tax questions. There is an outside CPA we can recommend with expertise in this area.
Please email firstname.lastname@example.org and we can connect you with someone.