How do I set up a checkbook IRA LLC? Is the setup process complicated? Are there some do’s and don’ts that apply in the process? You are about to find out about this and more in this comprehensive review if you simply read on till the end.
A good percentage of modern families are already putting together a financial plan for their future that includes saving for the retirement years. Some have taken to the use of self-directed IRAs in a bid to realize this objective. Self-directed IRAs are overseen by custodians, but there also exists another version referred to as checkbook IRAs.
A checkbook IRA is perceived as a powerful investing tool that account owners can rely on if they are out to take full control over their accounts’ activities. The owner of the IRA gets checkbook control over the funds in their accounts through the opening of a single-member LLC. The account owner, who is now the manager of the LLC, can then proceed to write checks authorizing the transfer of funds from their IRAs to the LLC for the purposes of investment.
The checkbook IRA structure is convenient for investors who would need fast access to their funds so that they can lock in on new investment opportunities as soon as they get wind of them. It also simplifies the money side of things by enabling the investor to quickly invest in a wide variety of assets, pay all bills for their IRAs, and process transactions.
The checkbook IRA setup process
The steps followed in the setup of checkbook IRAs differ from one investor to the other, simply because there are many different service providers involved in the process. Many companies will, however, have their customers go through the steps highlighted below:
1. Open and fund your self-directed IRA
You can fund the SDIRA you open using your retirement savings in other retirement plans by doing a direct or indirect rollover. In both cases, you can go about the rollover process without getting hit with any penalties, provided that you stick to the rules set by the IRS.
2. Create a single-member LLC
The next step lies in establishing a limited liability company, for which your self-directed IRA is the only member. Creating such a legal entity establishes a structure in which transactions will happen only between the SDIRA and the LLC only.
3. Appoint yourself as the general manager (or simply the manager) of the LLC
The first duty as the manager of the newly formed LLC will be to set up a bank account in the name of your LLC.
4. Start funding your LLC
You can now start utilizing the funds you rolled over to your SDIRA, for the purposes of investment, by transferring them to your LLC. This will allow you to purchase any assets that you find worthy of holding, and that are not prohibited by the IRS.
Checkbook IRA do’s and don’ts
There are a couple of things that you need to avoid doing in the process of creating or running a checkbook self-directed IRA. The failure to observe some of these principles will lead to you getting into trouble with the IRS, hence you should be sure to create a checklist from these do’s and don’ts to ensure that you are on the safe side.
Top Checkbook IRA do’s
- Open the LLC’s bank account in the name of the LLC, and not your personal name.
- Use the Employer Identification Number (EIN) that is affiliated with your LLC and not your personal EIN.
- The checkbook IRA investments should all be titled under the name of your LLC, not your official/government name.
- Always deposit the gains from the LLC-based investments into your SDIRA account, not your personal bank account.
- Manage your checkbook IRA without expecting or taking any form of compensation for doing the paperwork.
- Make the annual contributions to your self-directed IRA first, before sending them to the LLC.
- Pay for all the expenses associated with the investments using the funds in your LLC, not your personal funds. Some of the expenses you can meet using these funds include repair and maintenance costs, property insurance, property taxes, etc.
Top Checkbook IRA Don’ts
- Don’t use the funds in this structure for your personal needs.
- Avoid using the checkbook IRA assets. If you are using your self-directed IRA to invest in real estate, for instance, you should not live in the property.
- Do not personally perform any maintenance on your real-estate assets- the IRS policies disqualify you from doing this.
- Never deposit your personal funds into the checkbook IRA.
Is opening a checkbook IRA LLC a good decision?
Opening any type of retirement account is subject to many factors, and it is never that easy to give blanket opinions or speculations about which account is best for everyone. It will, however, make sense for you to open checkbook IRA LLC, if :
- You intend to invest in alternative investments that require multiple transactions in a year, such as real-estate property.
- You intend to actively take part in the management and safekeeping of your account.
- The custodian fees are too high for you to pay every year. Checkbook IRAs eliminate the need for the involvement of an IRA custodian and the custodian fees with them.
- Making timely investments is a necessity for you. With custodian-controlled IRAs, time-consuming processes are often involved as a review of your intended investments is carried out. This can, unfortunately, deny you the opportunity to swoop in when the prices are favorable. The best solution is, in this case, to open a checkbook IRA so that you can invest in your preferred assets as soon as you need to do so.
Frequently asked questions on “How do I set up a checkbook for an IRA?”
1. Should I open a checkbook IRA if I am a passive investor?
It would not make much sense to open a checkbook IRA if you are a passive investor unless you are out to avoid paying high custodian fees. If most of the assets you own can fit into the buy-and-hold structure without requiring multiple transactions per year, then you can use a custodian-controlled version instead. Whereas there may be delays as the custodian does the necessary paperwork, you will rest assured that they are looking out for you to ensure there’s total compliance with all the rules set by the IRS.
2. Will I still be allowed to invest in a wide variety of assets after opening a checkbook IRA?
Yes. Opening a checkbook Self-directed IRA does not take away the benefit of accessing a wide pool of investments, as is the case with a custodian-controlled self-directed IRA. The only difference between the two versions of self-directed IRAs is the involvement of the custodian.
3. Is a checkbook IRA legal?
Yes, they are! This is a question that is commonly asked by those who have never had the opportunity to explore alternative investments. You can also visit the Internal Revenue Service website to get the scope of IRAs and retirement plans, or you can explore the many comprehensive articles on this website.
4. What type of retirement accounts can I roll over into a checkbook IRA?
The IRS allows investors to transfer funds from any of the following retirement plans:
Also read more on these interesting topics below:
That will be all for today’s post in which we have looked at the question “How do I set up a checkbook IRA LLC?” I hope that reading through it gave you enough insights as to what is expected of you as the investor should you opt for this self-directed IRA version. If you still have more questions with regards to this topic, do not hesitate to let me know by dropping them in the comments section.
I wish you well,
Eric, Investor and Team Member at Gold Retired!