What is checkbook control in a self-directed IRA? What benefits does it present to those who rely on it to advance their retirement savings and investment activities? How does it work? We shall take a look at all that and more in today’s comprehensive article, so stick on till the end to find out more about this topic.
What is a Checkbook IRA?
A self-directed IRA with checkbook control is one that allows you to utilize your funds to invest in almost any type of investment, including precious metals, real estate, agriculture, and start-ups, tax-free. The main difference between a regular self-directed IRA and a self-directed IRA with a checkbook IRA is that with a checkbook IRA, you do not need any custodian to be present to consent to your investment activities. This essentially means that you will no longer have to deal with the custodian fees that other self-directed IRA owners have to deal with.
Custodian-controlled self-directed IRAs mainly offer you the benefit of gaining access to a wider pool of alternative assets, but the custodian still has to consent to the transactions. In some cases, they actually have to execute the transactions on behalf of the account owner. This can often lead to there being long delays in the execution of investment processes, as well as the earlier-highlighted high custodial fees. A custodian-controlled Self-directed IRA is, however, still popular amongst investors whose nature of investments does not involve a high frequency of transactions.
With a checkbook IRA, you can complete all transactions through your IRA’s physical checkbook, which according to most SDIRA owners, makes it easier for one to pay all the due bills, access funding, as well as deposit any income. Also, in addition to saving money by not parting with custodian fees, a Checkbook IRA increases the speed of financial transactions, making them a good option for those who would like to jump on investment opportunities as they come up. Moreover, you are bound to enjoy speed, privacy, and more control, by taking up the checkbook IRA option.
Reasons to establish a Self-Directed Checkbook IRA LLC
Investors have different reasons for opening checkbook IRA LLC versions of self-directed accounts. Here are some common examples:
Diversification of their retirement investment portfolios
These accounts present you with an opportunity to diversify your portfolio by adding alternative assets. Most of the alternative assets that are allowed for use in SDIRAs have excellent diversification properties, along with a greater income-generation potential. The risk associated with investing in such non-traditional assets is negatively correlated with that of paper assets. This means that those who hold non-traditional assets can expect impressive figures on their self-directed IRA balance sheets when stock owners are counting their losses.
The elimination of custodian fees
As we have already highlighted, a self-directed checkbook IRA LLC allows the owner of the account to take charge of the money side of things. They do not have to involve the custodian when paying the bills or purchasing assets. This, therefore, eliminates all the fees that would have accrued as a result of the involvement of the custodian.
If you are tired of all the bureaucracy that comes with investing for your retirement years, then a checkbook IRA version is a great option for you. You will not have to wait for your custodian to approve your investment decisions, and you will also purchase the alternative assets at any time you want to, subject to the terms and conditions stipulated by the IRS.
***Also read –How do I Set up a Checkbook IRA LLC?
How does a checkbook IRA work?
For you to obtain “checkbook control”, you need to create an LLC to which your IRA will invest, or send funds. This essentially means that your IRA, and not you as the individual, is the investor in the newly-opened LLC. Most IRA account owners generally have their IRAs as the sole investor.
Upon setting up the LLC, the general manager of the LLC is required to create a new business checking account in the name of the Limited Liability Company. The general manager must submit the necessary documents to the bank, including:
- Tax ID Number or EIN
- A copy of the Articles of Organization
You can opt to elect yourself as the Managing Member of the LLC, though this may require you to seek legal counsel as to what implications such a move might have on you. You will then have control of the checkbook, hence gaining “checkbook control over IRA.
What it really means to use an LLC in your self-directed IRA
As an investor, you are allowed to use your IRA as a legal entity to invest in your LLC, in a bid to purchase assets faster and to grant yourself more freedom to direct your retirement account. Relying on an LLC vehicle in your IRA ensures that you have direct access to your retirement funds so that you can make the necessary moves at the time that you need to. This is why checkbook control is a favorite option amongst real estate investors who need to access funds to do the necessary repairs and maintenance.
Do not forget that the assets in question are the IRA’s assets, and not the investor’s. This means that there should not be any instance in which the assets revert back to your individual account, but should always go to your IRA. If you decide to use your LLC to borrow a nonrecourse loan, then you will need to make additional tax filings for your IRA. This may call for the expertise of a tax advisor if you are to successfully maneuver it.
Frequently Asked Questions on “Checkbook Control in self-directed IRA?”
1. Which assets can I invest in using a self-directed IRA with “Checkbook control”?
With this type of account, you are allowed to make any type of investment, including the following:
- Tax liens
- Real estate
- Precious metals
- Commercial paper
- Alpaca farming
- Hard money loans
- Alpaca farming
- Energy, etc.
2. How do I fund my self-directed IRA with checkbook control?
The IRS allows you to use your earned income to fund your individual retirement account, or any other retirement plan provided that you do not contribute more than the maximum contribution limit. You can make a direct transfer from your bank account, or you can simply decide to do a rollover (direct or indirect) from your other qualifying retirement plans to your self-directed IRA.
Read more about how to do an IRA rollover in this detailed post.
3. How do I set up a checkbook IRA?
The steps you follow when opening a checkbook IRA vary from one investor to another, but here are some of the commonly followed ones:
- Open a self-directed IRA and fund it.
- Establish a single-member LLC and designate your IRA as the sole member.
- Appoint yourself as the manager of your IRA’s LLC, then create a new bank account in the name of the LLC.
- Transfer funds from your IRA to the new LLC.
4. Is a self-directed IRA with checkbook control better than a custodian-controlled self-directed IRA?
This is dependent on an investor’s perspective and needs. Generally, however, investors turn to a self-directed IRA with checkbook control when they want more convenience and control. After gaining checkbook control, the investor is, through the IRA, responsible for making all the investment decisions, and for seeing to it that the LLC does not violate the rules on prohibited transactions. The manager of the LLC is required to maintain accurate records of all transactions, should there be any need for the IRS to scrutinize their books.
Note that as the manager of the newly formed LLC, you are not allowed to receive any salary or compensation for all the work you put into ensuring that the LLC is functional.
More interesting & informational reads
That will be all for this post on “what is checkbook control in a self-directed IRA?”. I hope that you found it informational and that it will help you decide whether you will gain more control of your investments in the self-directed IRA by switching to the version that allows checkbook control. Let me know if you have more questions on today’s topic by simply dropping them in the comments section.
I wish you well,
Eric, Investor and Team Member at Gold Retired!