What is a Checkbook IRA? Checkbook IRAs allow investors to directly manage their retirement funds and allocate them toward investments. Contrary to popular belief, a Checkbook IRA is not a separate retirement plan type. From a tax benefit standpoint, a Checkbook IRA can be a Traditional IRA, Roth IRA, or any other self-directed retirement account. The “checkbook” designation simply refers to the account holder’s unique type of control over the disbursement of tax-advantaged retirement dollars.
Ready to open a Checkbook IRA? Click here to access our easy online new account application!
So how does this work?
- Step One – Open an IRA. As mentioned above, a prospective Checkbook IRA holder can open any account type of his or her choosing.
- Step Two – Fund the Account. IRA holders can make contributions, transfer funds from another IRA, or roll funds from another retirement plan.
- Step Three – Open and Fund an LLC. To achieve “checkbook control”, the account holder would open an LLC (or a similar business entity), fund it with IRA money, designate him or herself as the manager, and establish a checking account for the LLC.
- Step Four – Make Investments. As manager of the LLC, the account holder could review and directly execute investments on behalf of the entity. The LLC would own the investments and the IRA would own the LLC.
As you can see, a Checkbook IRA affords a degree of flexibility over one’s retirement investments. However, always remember that:
- The rules follow the money – IRS rules surrounding cash flow still apply to IRA-owned LLCs. If your LLC-owned investments bear fruit, those earnings belong to the IRA.
- Prohibited transactions can be more difficult to avoid – Regardless of the account holder’s intention, prohibited transactions may occur more easily with checkbook control because investments don’t flow past the watchful eye of the IRA custodian.
- UBIT may still apply – The LLC may own the assets, but they still reside under the umbrella of the retirement plan. Unrelated business income tax (UBIT) may therefore apply on earnings attributable to debt leverage or investments in passthrough operational entities, even under the Checkbook IRA model.
- Fair market valuations are still required – When a self-directed retirement plan directly owns alternative IRA investments (real estate, private equity, etc.), the holder must obtain and submit fair market valuations of said investments every year. The same is true with a Checkbook IRA; although the individual investments are not directly owned by the IRA, the LLC itself must be valuated as the IRA’s true asset. The LLC’s value would be derived from its holdings.
As an education-based custodian, NDTCO is happy to assist with your questions or concerns. Please don’t hesitate to give us a call at 877-742-1270 or send us a message through the Client Portal.