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A Checkbook IRA is an investment approach that allows the account holder to write checks using the IRA’s cash. The account holder achieves this control by establishing and managing an account-owned entity (often an LLC). This setup allows investors to manage their cash and account assets directly as the LLC/entity manager.
Ready to open a Checkbook IRA? Click here to access our easy online new account application! (Note that “Checkbook IRA” is not an account type you can open. Open your desired account and let NDTCO help you make it a Checkbook IRA!)
The IRS requires a buffer between the IRA holder and the IRA’s assets. Usually, this buffer is provided by the self-directed IRA custodian. This account structure, however, circumvents that arrangement.
The following is a delineation of the benefits and the responsibilities of a Checkbook IRA. Though detailed, this comparison is not exhaustive. Please contact New Direction Trust Company to learn more about the parameters of a Checkbook IRA structure.
Why Choose a Checkbook Control IRA?
The speed with which you can disburse funds plus the avoidance of administrative fees can make Checkbook IRAs attractive. Once the IRA buys the LLC, the majority of the work shifts to the Checkbook IRA account holder/entity manager. The purchase, sale, and management of assets within the entity can proceed without interaction with the IRA custodian. This means transactions can proceed without oversight and can typically execute more quickly.
Shifting management responsibilities to the Checkbook IRA holder/entity manager can reduce transaction-based fees from the IRA custodian. Like all other self-directed IRA accounts, Checkbook IRA holders enjoy the ability to invest in any asset that the IRS allows (life insurance or collectibles are not allowed per Section 4875 of the IRS code).
Rules And Responsibilities For Checkbook IRAs
It is the account holder’s responsibility to create the LLC/entity within the IRA account. The account holder can have a professional perform this task or they can perform it themselves. The entity document must not contain language that disallows ownership of shares by an IRA.
The account may not purchase the entity from the account holder or from a disqualified person. Appointing a disqualified person as manager can take place after the LLC has been funded by the account. Titling of the assets will be in the name of the LLC rather than the IRA.
For assets held by the Checkbook IRA’s LLC, responsibility for the bookkeeping of the IRA assets shifts from the IRA administrator to the account holder/LLC manager, as does responsibility for the legality of the LLC’s actions and its adherence to IRS rules. Additionally, the Checkbook IRA holder is responsible for adhering to all applicable state laws.
As manager of the entity, you will file tax returns, file the annual reports, and pay reporting fees to the Secretary of State on its behalf. Filing Form 1099s or other IRS reports may also be necessary. Keep in mind that the requirements for an account-owned entity are the same as any other business entity and is subject to IRS audit.
Concerns for Checkbook IRA Owners
Historically, a lack of independent oversight and formal reporting requirements associated with Checkbook IRAs has given unscrupulous individuals opportunities to violate IRS rules. However, the IRS has its eye on Checkbook IRAs, so the audit risk may be higher accordingly. This attention falls upon all Checkbook IRA investors, not just the bad apples.
For most states, account-held entities are not required to file tax reports with the IRS. This allows many of these accounts to fly under the IRS radar. As a new method for potentially addressing this issue, the IRS began requiring IRA custodians to indicate IRA ownership of any LLCs on all annual tax reports in 2016.
IRA law prohibits the IRA owner from providing services to his or her IRA and its owned assets. The exact definition of what “providing a service” looks like is vague in the IRS code, which means courts could interpret the definition of this very strictly to include management and accounting services for an IRA. Such a ruling could put the status of Checkbook IRAs in jeopardy and potentially result in substantial taxes and penalties for the IRA owner.
The creation and ongoing maintenance of an LLC or other entity within a Checkbook IRA can be a hassle for the account holder and may therefore present another potential drawback. The LLC or entity will need a bank account, Tax ID number, financial books, filing systems, and accounting/recordkeeping. For many clients, allowing the IRA custodian to handle the processing of an account’s transactions is well worth the associated fees.
Conduct Due Diligence and Ask Questions
While owning an LLC or other entity in your tax-advantaged plan can provide some investment flexibility, it requires greater responsibility on the part of the IRA holder. This investment structure has been identified as “high risk” in regard to Internal Revenue Code Section 4975, 408, 408A, and other applicable codes.
Contact New Direction Trust Company at 877-742-1270 or by submitting a message through the Client Portal.
