I am starting to warm up to the idea of clients using SDIRA TRUST SSN as your tax ID. My recent blog discussed filing for and using a distinct EIN for your self-directed IRA Trust. While I still have a slight preference for creating such an EIN, one SDIRA custodian I work with now accepts the use of a SSN with certain conditions.
SDIRA TRUST SSN – Benefits
There is a concern by some in the industry that creating an EIN for the Trust will trigger the IRS to expect a Form 1041 tax return for the Trust. Thus, if no EIN, no tax return expected. That’s the benefit, and it is significant to many people.
You will be required to provide a tax ID number to any financial institution for which you want to open an account in the name of the Trust. The institution will use that tax ID for any 1099 forms it creates, such as 1099-Div or 1099-Int. You do NOT want the financial institution to issue a taxable 1099 to your SSN for IRA assets. There is a solution to this dilemma!
Submitting a W-9
W-9 example <— This link will open a PDF which shows you what information to place where on a W-9. The W-9 is part of the paperwork any financial institution, investment company etc will provide when opening a new account. Based on my research, I believe that any account opened this way will result in NO W-9 issued for that account. Problem solved! Probably.
SDIRA TRUST SSN – Drawbacks
Investing an IRA into a grantor trust is a new idea this year. The two custodians I work with, top in the industry, had never opened a grantor trust for an IRA. Standard procedure for opening a Trust account with them includes providing an EIN for the Trust. These custodians are now willing to accept the Trust application with no EIN, instead noting that you will use your SSN for all trust accounts.
I do not foresee any issues. However, as of today, I do not have any clients who have gone through a full tax cycle with this idea. The financial institutions should not create a 1099 for any realized income based on the W-9. These institutions document deductions to their income by issuing 1099s for income / dividends / interest paid. How do they internally account for payments to an account under a SSN claiming a tax exemption? Depends on the institution, and I am not sure they all have it figured out.
Most of our IRA Trust clients are not creating accounts at institutions where a W-9 is required. For the most part, this is a non-issue, whereas creating an EIN for the Trust which might not ever be used does open up the possibility of tax return expectations by the IRS.
Bottom line is that using an EIN versus your SSN for a grantor Trust funded by your IRA contain competing benefits and drawbacks. If you create an LLC for your IRA you WILL be required to create an EIN. This EIN versus SSN issue is a 2nd significant benefit for an IRA Trust compared to an IRA LLC.
SDIRA TRUST Tax ID – Decision
I strongly believe that whether a client should use an LLC or a Trust with their IRA should depend more on the investment desired rather than saving money on registration fees or avoiding the need for an EIN. You can set up a phone consult with this link. Let’s talk about your ideas!