Can a Roth IRA Own an LLC? Prohibited Transactions and UBTI

A Roth IRA can own an LLC, but only if you set it up through a self-directed IRA custodian and follow the same tax rules that govern the IRA itself. The LLC becomes a wholly owned investment of the Roth, giving you direct control over assets like real estate, private notes, and precious metals while keeping the Roth’s tax-free growth intact. The structure is legal and well-established. It is also unforgiving: one prohibited transaction can wipe out the account’s tax-exempt status retroactive to January 1 of that year.

How the Ownership Actually Works

Standard brokerages and banks don’t allow IRAs to invest in private entities, so the first step is moving your Roth funds to a self-directed IRA (SDIRA) custodian that permits alternative assets. The custodian holds the IRA, and the IRA in turn buys a 100% membership interest in a newly formed single-member LLC. The operating agreement names the SDIRA as the sole member. You are appointed as the LLC’s non-compensated manager.

That manager role is what people mean by “checkbook control.” You open the LLC’s bank account, write the checks, and make day-to-day investment decisions without waiting for the custodian to approve each transaction. The custodian’s ongoing job shrinks to recordkeeping, annual IRS filings, and maintaining the IRA’s legal structure.

The LLC’s bank account must be titled in the LLC’s name and reflect the Roth IRA’s ownership. Every dollar of investment capital flows through that account and stays there. The LLC is a pass-through entity owned by a tax-exempt Roth IRA, and everything it does remains subject to Internal Revenue Code Section 408, which governs IRA investments, and Section 4975, which governs prohibited transactions.¹ The legal separation between you and the LLC has to be absolute. Treat the LLC’s money as someone else’s, because legally, it is.

Disqualified Persons and Prohibited Transactions

Prohibited transactions under IRC Section 4975 are the single greatest threat to this structure. A prohibited transaction is any deal between the IRA (including its LLC) and a “disqualified person.” It does not matter whether the deal is fair, at market rate, or genuinely beneficial to the IRA. If a disqualified person is on the other side, the transaction is prohibited regardless of its terms.²

Disqualified persons include:

You, the IRA owner, and your spouse
Your lineal ancestors and descendants (parents, grandparents, children, grandchildren) and their spouses
Fiduciaries of the IRA, including the custodian
Service providers to the IRA
Any corporation, partnership, or trust in which you or other disqualified persons hold 50% or more ownership

The statute bans any sale, lease, loan, or service arrangement between the IRA-owned LLC and any disqualified person. The most common violations don’t feel like “transactions” at all: staying a weekend in a property the LLC owns, paying yourself to manage its rentals, hiring your son’s construction company to renovate an LLC-owned building, or personally guaranteeing a loan the LLC takes out. The IRS treats a personal guarantee as an extension of credit between you and the plan.

You can serve as the LLC’s manager, but only without compensation. The moment you draw a salary, management fee, or any other payment from the LLC, you’ve engaged in a prohibited transaction. That catches people off guard, because in any other LLC, paying the manager is routine.

What Happens If You Slip

The penalties hit from two directions at once.

First, the Roth IRA itself dies. Under IRC Section 408(e)(2), if you or your beneficiary engages in a prohibited transaction, the account ceases to be an IRA as of the first day of that tax year. The IRS treats the entire account as if it distributed all assets at fair market value on January 1.¹ For a Roth, your original contributions come out tax-free, but all earnings become taxable ordinary income. If you’re under age 59½, a 10% early distribution penalty applies to the taxable portion.³

Second, the disqualified person who participated in the prohibited transaction owes an excise tax of 15% of the amount involved for each year the transaction remains uncorrected. If it isn’t fixed within the taxable period, the penalty jumps to 100% of the amount involved. These excise taxes are reported on Form 5330.⁴⁵

Concrete numbers make it real. A Roth IRA worth $300,000, with $100,000 in original contributions and $200,000 in growth, loses its Roth status retroactively the moment you spend a week in the LLC’s rental. The $200,000 in earnings becomes taxable income. A 45-year-old owner would face roughly $10,000 in combined federal and state income tax (depending on bracket), a $20,000 early distribution penalty, and the 15% excise tax on top. A free vacation turns into a six-figure tax bill.

Investments the LLC Still Cannot Hold

The LLC does not unlock any asset class the IRA itself is barred from owning. Every statutory prohibition on IRA investments applies to the LLC.

Under IRC Section 408(m), if the LLC acquires a “collectible,” the IRS treats the purchase as a taxable distribution from the IRA in the amount of the acquisition cost. Collectibles include artwork, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property. Narrow exceptions exist for specific gold, silver, and platinum coins and bullion meeting fineness standards, but the default rule bars these purchases.¹

Life insurance is also off-limits. Section 408(a)(3) prohibits investing IRA trust funds in life insurance contracts, and the LLC cannot be used to work around that. S corporation stock is out too: IRAs are not permitted S corporation shareholders under IRC Section 1361.⁶

Personal money cannot flow into the LLC, and LLC money cannot flow out for personal use. Commingling in either direction blurs the legal separation the entire structure depends on and risks both a prohibited transaction and losing the LLC’s liability protection.

UBTI and Debt-Financed Income

Even without a prohibited transaction, certain kinds of income earned inside the LLC can trigger current-year taxation. This is unrelated business taxable income (UBTI), defined under IRC Section 512. UBTI doesn’t destroy the IRA, but it makes a slice of the income taxable now instead of never.⁷

Most passive income is excluded. The statute exempts dividends, interest, royalties, annuities, and rents from real property. If the LLC buys rental properties and collects rent checks without providing significant services to tenants, the income stays tax-free inside the Roth. Where investors run into trouble is when the LLC operates an active business: flipping houses, running a retail operation, or providing hotel-style services alongside a rental.

When the IRA’s gross UBTI exceeds $1,000 in a year (after a $1,000 specific deduction), the IRA must file Form 990-T and pay tax on the excess out of its own funds.⁸ UBTI is taxed at trust and estate rates, which compress into the top 37% bracket by roughly $16,000 of taxable income for 2026, so the math turns ugly quickly.⁹

Leverage adds another taxable layer. Under IRC Section 514, when the LLC borrows to acquire an income-producing asset, the portion of income attributable to the borrowed funds becomes unrelated debt-financed income (UDFI) and is taxed as UBTI.¹⁰ The taxable percentage equals the average acquisition indebtedness divided by the average adjusted basis for the year. If the LLC puts $200,000 of IRA cash and $200,000 of non-recourse loan proceeds into a $400,000 rental, roughly half the net rental income is UDFI. As the loan is paid down, the taxable percentage drops.

Any loan the LLC takes must be non-recourse, meaning the lender’s only collateral is the property itself. You cannot personally guarantee the debt without triggering a prohibited transaction. Non-recourse loans for IRA-owned property carry higher rates and stricter terms than conventional mortgages, and that cost sits alongside the UDFI tax when you’re deciding whether leverage makes sense.

Funding the LLC in 2026

The only money that can enter the LLC is money that first passes through the Roth IRA. That means Roth contribution limits and income phase-outs directly cap how much new capital you can put to work each year. For 2026, the base contribution limit is $7,500. If you’re 50 or older, an additional $1,100 catch-up brings the total to $8,600.¹¹

Direct contributions phase out by modified adjusted gross income (MAGI):

Single filers: full contributions below $153,000 MAGI, partial between $153,000 and $168,000, none at $168,000 or above.
Married filing jointly: full below $242,000, partial between $242,000 and $252,000, none at $252,000 or above.
Married filing separately: partial contributions only below $10,000 MAGI, none at $10,000 or above.

Rollovers from other retirement accounts and backdoor Roth conversions are separate funding paths not subject to these MAGI thresholds, though conversions carry their own tax consequences. Annual contributions alone rarely provide enough capital for a real estate portfolio, so most investors funding this structure rely on rollovers from existing traditional IRAs or old 401(k) accounts.

Annual Valuation and Ongoing Costs

Every IRA must report its fair market value to the IRS each year, and an LLC interest is no exception. The SDIRA custodian files Form 5498 reporting the year-end value of the LLC ownership interest.¹² You, as manager, generally have to give the custodian a supportable number. For real estate that might mean a licensed appraisal, a broker’s price opinion, or a county tax assessment. For private notes or other financial instruments, a CPA or independent valuation firm may be needed. Whoever provides the valuation cannot be a disqualified person, and if the appraisal costs money, the IRA pays for it out of IRA funds.

Running an IRA-owned LLC costs more than a standard Roth at a brokerage. Recurring expenses typically include:

SDIRA custodian fees, often $300 to $500 per year, plus setup, transaction, and wire fees.
State LLC filing fees for annual or biennial reports, from under $100 to a few hundred dollars depending on the state.
Registered agent service, roughly $50 to $300 per year if you use one.
Annual valuation costs, from a few hundred dollars for a simple rental to several thousand for complex holdings.
Tax preparation for Form 990-T if the LLC generates UBTI or UDFI, and Form 1065 with Schedule K-1s if the IRA is a partner in a multi-member LLC.¹³

Every one of these costs must be paid from the IRA’s funds or the LLC’s bank account. Paying them out of your personal checking account is a contribution to the IRA at best, subject to annual limits, and a prohibited transaction at worst. For smaller Roth balances, these fixed costs can eat into returns enough to make the structure impractical. It tends to make financial sense only when the IRA holds enough capital that the fees are a small percentage of assets and the alternative investments justify the added complexity.

1
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
2
Office of the Law Revision Counsel. 26 USC 4975 – Tax on Prohibited Transactions
3
Internal Revenue Service. Retirement Topics – Prohibited Transactions
4
Internal Revenue Service. Retirement Topics – Tax on Prohibited Transactions
5
Internal Revenue Service. Form 5330 – Return of Excise Taxes Related to Employee Benefit Plans
6
Office of the Law Revision Counsel. 26 U.S. Code 1361 – S Corporation Defined
7
Office of the Law Revision Counsel. 26 USC 512 – Unrelated Business Taxable Income
8
Internal Revenue Service. Unrelated Business Income Tax
9
Internal Revenue Service. 2026 Form 1041-ES – Estimated Tax for Estates and Trusts
10
Office of the Law Revision Counsel. 26 USC 514 – Unrelated Debt-Financed Income
11
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
12
Internal Revenue Service. Form 5498 – IRA Contribution Information
13
Internal Revenue Service. IRA Partner Disclosure FAQ