Checkbook Control IRA
What is Checkbook IRA or Checkbook Control IRA
IRAs that are held at a custodian generally do not have checkbook control. These types of custodians review all investment paperwork, not in a fiduciary manner, but merely in a custodial manner and charge their relevant fees.
When a self-directed IRA owner has complete signing authority over the retirement account funds, the term “checkbook control” is used. This strategy can only be applied after a Self-Directed IRA LLC (business entity) is established that allows it to have a checking account. With checkbook control, the account holder does not have to depend on the custodian’s consent when making any alternative investments or wait for his/her approval when purchasing property or precious metals. Moreover, it allows the account holder to exercise complete control over all the assets and investments with absolute ease and efficiency.
However, there are certain transactions that you, as the IRA holder, cannot carry out. This includes taking a salary from the LLC or making a distribution to yourself directly without letting the assets go through your IRA custodian to report the distribution.
So, a checkbook IRA is just the same as a traditional IRA except that it comes with the great investment flexibility and signing authority.
How Does Checkbook Control IRA Work?
To gain “checkbook control,” you need to first set up an LLC through which your IRA can fund and invest. This means that not you, but your IRA is the investor of the LLC. In most cases, IRA holders have their IRA as the only member/investor.
At Self Directed Retirement Plans LLC, we use a passive custodian. We create an underlying LLC for each of our IRA clients. LLCs have managers and members. The LLCs we create will be manager-managed. The client will be the manager, and the member of the LLC will be the custodian (FBO) for the benefit of the IRA.
Once the new LLC is created, the manager of the LLC has to open a business checking account in the name of the LLC. To open the checking account, you need to present a copy of the Articles of Organization and the tax ID number (EIN) to the bank.
Once the LLC checking account is established, the custodian funds it by sending money from the IRA account to the LLC account. When the LLC account is funded, the client has “checkbook control” and can invest quickly without any permission from the custodian.
The Do’s and Don’ts of Checkbook Control IRA
When you are investing in alternative investments like precious metals, promissory notes, real estate, private placements, or tax liens, it is important that you familiarize yourself with the rules and regulations of checkbook IRA.
- Set up the checkbook IRA account in the name of the LLC and not in your name.
- Be sure to use the LLC EIN (employer identification number) for opening the checkbook IRA bank account.
- Make sure all checkbook IRA investments are titled in the name of the LLC and not in your personal name.
- All the investment expenses that are associated with assets in your checkbook IRA must be paid using the funds in your checkbook IRA. Do not use your personal funds to pay for property taxes, repair costs, or property insurance for a real estate property that is linked to your checkbook IRA.
- Deposit all your gains in your checkbook IRA bank account.
- Make all your annual contributions to your self-directed IRA first and not to your checkbook IRA.
- A disqualified person is not allowed to extend any immediate credit nor receive any immediate benefit from the IRA.
- Disqualified persons are generally the IRA account owner, spouse, children, grandchildren, parents, grandparents, and their respective spouses.
- If the IRA benefits from a disqualified person or if a disqualified person benefits from the IRA, it would be a prohibited transaction.
- There are three types of investments not allowed inside your self-directed IRA:
- Life Insurance Contracts – however, certain annuities are allowed
- Collectibles– such as rugs, classic cars, stamp collections, etc.
- Shares of an ‘X’ Corporation– your plan is not a person but a business entity
Examples of Self directed ira prohibited transactions
Your IRA is allowed to purchase a rental property. Your daughter would like to pay rent and live there. She is a disqualified person and therefore it would be a prohibited transaction. However, your niece indicates she would like to live and pay rent. Since she is not a disqualified person, it is permissible and not a prohibited transaction.
Your son would like a loan from your Self-Directed IRA to help with college expenses. Again, he is a disqualified person so your IRA should not make the loan. Your brother also asks for a loan – for any purpose – he is not disqualified therefore your IRA can make the loan.