A Checkbook IRA, also known as a Checkbook Control IRA, is an Individual Retirement Arrangement that allows the investor to write checks using the IRA’s cash. Investors may choose a Checkbook IRA because it’s an account structure that shifts direct access to IRA cash and assets from the IRA provider to the account holder. This control is achieved by the IRA buying 100% share of an entity (often a Single Member LLC), that the IRA holder then manages. This setup allows investors to manage their cash and account assets directly as the LLC/entity manager.
The IRS requires there to be a buffer between the IRA holder and the IRA's assets. Usually, this role is fulfilled by the self-directed IRA provider. The Checkbook IRA 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 pros, cons, and parameters of a Checkbook IRA structure.
Speed with which you can disburse funds plus avoidance of administrative fees are the main reasons an investor may choose a Checkbook IRA. Once the IRA buys 100% of the LLC or entity, the majority of the work for investments shifts to the Checkbook IRA account holder/LLC manager. Purchase, sale, and management of assets within the IRA’s LLC can proceed without interaction with the IRA provider; so transactions can proceed without oversight and can typically be accomplished quickly.
Since managing the paperwork and bookkeeping for those transactions shifts to the Checkbook IRA holder/LLC manager, transaction-based fees from the IRA provider are often lower after the Checkbook IRA is established. Like all other self-directed IRA accounts, Checkbook IRA holders enjoy the ability to invest in any asset that the IRS allows (just no life insurance or collectibles, per section 4875 of the IRS code).
It is the Checkbook IRA holder's responsibility to create the LLC or other 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.
At the time the Checkbook IRA makes an investment, ownership of the IRA’S LLC must not lie with the IRA holder or any other disqualified person. Appointing a disqualified person as manager can take place after the LLC or entity has been funded by the Checkbook IRA. 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 or entity, 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 state laws that apply to the location where the IRA’S LLC is created. Swanson vs. the Commissioner is the court case most often referenced when discussing the legality of a Single member LLC inside a Checkbook IRA.
As the manager of your IRA's LLC or other entity, you will file the tax returns (if needed) for the entity, file the annual reports, and pay reporting fees to the Secretary of State. Filing 1099s or other IRS reports may also be necessary. Remember to keep in mind that the requirements for an LLC owned by your self-directed IRA are the same as any other business entity, and are subject to IRS audit.
There are online markets which bundle Checkbook IRA services together for a base rate. However, it’s common for these bundling promoters to charge more than it would cost to arrange each element separately through an IRA provider. Exercising due diligence and comparing costs between IRA providers are the best way for retirement investors to find the most efficient deal for establishing a Checkbook IRA.
Historically, lack of independent oversight and formal reporting requirements associated with Checkbook IRAs has given unscrupulous individuals opportunities to violate IRS rules, with a low-likelihood of being caught. However, the recent increase in court case activity indicates that the IRS is focusing attention on Checkbook IRAs and increasing the audit risk for all such entities. This attention falls upon all Checkbook IRA investors – not just the bad apples.
For most states, LLCs held within a Checkbook IRA are not required to file tax reports with the IRS, which allows many of these accounts to fly under the IRS radar. As a new method for potentially addressing this issue, starting the 2016 tax year, the IRS is requiring that IRA providers indicate IRA ownership of any LLCs on all annual tax reports.
IRA law prohibits the IRA owner from providing services to his/her IRA and its’ owned assets. The exact definition of what “providing a service” looks like is vague in 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 IRA owner. 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 provider to handle the processing of a Checkbook IRA account’s transactions is well worth the associated fees.
While owning a Single Member LLC or other entity in your Checkbook IRA can provide some flexibility in regard to investing your IRA funds, it requires greater responsibility on the part of the IRA holder. A Checkbook IRA has been identified as “high risk” in regard to Internal Revenue Code Section 4975, 408, 408A, and other applicable codes.