EXPLAINED: EINs for your self-retirement accounts

[Michael Plaks]

This issue has been repeatedly discussed on the forum, but investors, especially new ones, are still confused.

Let's go through it one more time, but I will start with the end: your self-directed retirement accounts should obtain their own EINs as a trust.

1. Each taxpayer needs to have a tax ID, and there're three main kinds: SSNs for persons who are permanent residents or citizens, ITINs for non-residents and EINs for businesses/employers.

2. A self-employed person or an investor often IS an employer. Hiring contractors means being an employer, and such an employer has tax responsibilities, including issuing 1099s. One can issue 1099s using their personal SSN. While it's not breaking any rules, it is a potential privacy/security issue, albeit SSNs are no longer safe these days anyway. 

3. If a person is an employer, they can obtain an EIN which is basically a substitute for the owner's SSN. Now, instead of issuing 1099s from your personal SSN, you can issue them from your personal EIN. Nothing changes except the recipients (contractors) do not see your SSN. 

4. Likewise, you can use this personal EIN instead of your SSN for any other tax-related purpose, for example give it to businesses who are supposed to report your income on 1099s or K-1s.

5. Many investors operate their business as a single-member LLC which is disregarded for tax purposes. In other words, it is NOT treated as a separate taxpayer. Instead, it's treated the same as if there was no LLC. Such single-member LLCs should also obtain an EIN, and it will be linked to an owner's SSN. Whatever taxable income is linked to this EIN is actually applied to the underlying SSN.

6. Each person can only have one EIN linked to their SSN, even if they run multiple businesses. Side note: DOGE reportedly discovered that the reality was different, but at least this is how it was supposed to work.

7. If a business is a separate taxpayer, it needs its own EIN which is NOT linked to any SSN. All corporations, C- and S-, all partnerships and many trusts are in this category.

8. A retirement account is a trust. Conventional retirement accounts invest in mutual funds, stocks and bonds. This income is typically not subject to taxes or IRS reporting, so EINs are not needed. 

9. However, this is not the case for self-directed retirement accounts involved in real estate. We have many common situations where these accounts can be involved in IRS reporting:
- hiring contractors who need 1099-NECs issued from your SDIRA
- private lending when your SDIRA receives interest reportable on 1099-INT
- selling properties reportable on 1099-S
- investing in syndications reportable on K1s
- SDIRA required reporting for UBIT on 990-T
- and more

In all the above cases, your self-directed retirement account needs to obtain its own EIN as a trust. It's free and instant on the IRS website. 

Example: the syndication where you invested via your SDIRA sold a property, and there are capital gains. This income will be linked to the tax ID of the passive investor. The investor is your SDIRA, and the tax ID should be its unique EIN - as a trust - which is NOT linked to your SSN. If it happens to be linked to your personal SSN, then YOU owe taxes on this capital gain, defeating the purpose of using a self-directed retirement account.