A checkbook IRA can provide several advantages to account holders, such as lower costs and more control over one’s investments. Here’s everything investors need to know about how to make the most of it.
In this article:
- What Is Checkbook Control?
- How Do People with a Checkbook IRA LLC Fund Their Account?
- What Steps Should Investors Follow When Setting Up a Business Checking Account?
- Who Would Benefit the Most from Opening a Checkbook IRA LLC?
- What Are Some of the Downsides of a Checkbook IRA?
- Why Would an Investor Want to Become an LLC?
- What Are Some Things to Avoid with a Self-Directed IRA with Checkbook Control?
- Are There Costs Associated with Opening a Checkbook IRA?
- Consider Meeting with a Financial Advisor First
Checkbook IRA FAQs | Everything Investors Need to Know
What Is Checkbook Control?
The term “checkbook control” refers to the signing power the owner of a self-directed Individual Retirement Account (IRA) has to access his or her own retirement funds. Before the financial institution holding the IRA grants this right, the IRA owner must create a self-directed IRA LLC with checkbook control.
What is an IRA LLC?
The new LLC then becomes a separate business entity with the ability to create a separate checking account.
People considering a self-directed IRA with checkbook control often have several questions. Below are answers to some typical questions about this topic.
How Do People with a Checkbook IRA LLC Fund Their Account?
The account holder funds his or her account by using retirement assets, such as an IRA. The benefit of this option is it offers greater flexibility and makes it easier for the account holder to manage assets. It can also help investors save money in management fees.
What Steps Should Investors Follow When Setting Up a Business Checking Account?
After establishing the LLC, the self-directed IRA checkbook general manager should establish a checking account in its name. To do this, he or she needs an employer identification number (EIN) and an Articles of Organization document.
Some people with checkbook control IRA choose to name themselves as a managing member.
Who Would Benefit the Most from Opening a Checkbook IRA LLC?
a. Investors Looking to Invest in Promissory Notes or Real Estate
Those who intend to invest in promissory notes or real estate and want to manage the IRA themselves are good candidates for this type of account since this type of setup is typically used for these types of assets.
A checkbook IRA lets IRA owners handle certain management tasks (e.g. paying property taxes and insurance), which can eliminate custodial delays. Some of its benefits include:
- Allows for faster transactions, which would especially be useful in time-sensitive ones such as moving in on foreclosures
- Can also benefit investments that need frequent transactions, such as “fix and flip” investments and rental properties
b. Those who Want to Pay Lower Fees
It’s also a good option for people looking to reduce custodian fees. Additionally, investors who own multiple assets in one LLC only have to pay for one asset.
c. Investors Who Want to Have More Control Over their Investments
Finally, those who desire to have a greater ability to control their own investments may also want to look into a checkbook IRA. Writing a check against the account saves time because it doesn’t require review by an IRA custodian.
Like all types of IRAs, checkbook IRA accounts enjoy a tax-deferred status. This allows people to set aside money for investments or retirement and not pay any federal or state income tax until they withdraw the funds.
What Are Some of the Downsides of a Checkbook IRA?
Checkbook IRAs, for all their benefits, also come with certain complexities interested investors should look out for before making any decisions.
a. Red Tape — To qualify for a checkbook IRA, investors would need to fulfill certain requirements, such as having a net worth of at least $250,00. Checkbook IRA owners would also have to go through a comprehensive yearly audit from a certified public accountant.
b. No Universal Guidelines for Recordkeeping –– Each state has its own recordkeeping requirements for LLCs. In this scenario, one might have to look into getting legal help to better understand state requirements.
c. No Professional Guidance — With greater flexibility and control also comes more responsibility, which is why checkbook IRAs might be better suited for savvy investors. Those who are only starting out may have difficulty navigating the complex processes involved in managing their funds without professional help.
Why Would an Investor Want to Become an LLC?
Taking the step to become a legal entity provides the ability to purchase assets directly. This is popular among those with alternative investments who need to access cash quickly. All funds earned from money used for the investment go back into the IRA.
What Are Some Things to Avoid with a Self-Directed IRA with Checkbook Control?
Since the investor legally becomes an LLC, he or she can’t use money from IRA funds or assets for personal purchases. It’s also important to avoid depositing money from personal accounts into the checkbook IRA account or processing IRA distributions from the LLC.
If the investor also has real estate assets inside the checkbook IRA, the account holder can’t perform repairs on it since he or she is considered a disqualified party.
Are There Fees and Other Costs Associated with Opening a Checkbook IRA?
Each state sets its own requirements on establishing a checkbook IRA. Account holders should make sure they understand any fees or tax issues associated with forming an LLC for investment purposes.
Consider Meeting with a Financial Advisor First
A financial advisor knows the checkbook IRA account requirements for each state and can advise investors accordingly. This is also true of specific recordkeeping and business formation requirements.
Another good reason to meet with a financial advisor is that he or she can explain everything involved with a self-directed IRA checkbook and ensure the client feels this is the best investment option moving forward.
A checkbook IRA can provide several benefits to IRA account holders, particularly those who want to have more control over the investment, want to invest in alternative investments like real estate and promissory notes, and those looking to reduce costs.