When researching Checkbook Control IRAs, it is a good idea to look into the drawbacks as well as the benefits before moving forward. There are responsibilities the IRA holder must understand. You might want to ask yourself, “Do I really want this much control of my retirement funds?” Ask the following questions before proceeding:
There are a couple of drawbacks and some out-right dangers. For Checkbook Control, you must have an entity created. In most cases, that entity is an LLC. The LLC is a company for which someone must be responsible. In order to manage the entity, you must know all the rules of both running an entity and all the IRS rules about the IRA itself. Educating yourself on both sets of rules can take a fair amount of time to grasp. Although many of them are not hard, if you don’t stay current, you may forget or miss something important. Remember, IRS rules regarding prohibited transactions don’t always make sense. Applying logic doesn’t always get you to the right answer. And the consequences for the IRA of breaking IRS rules can be significant taxes and penalties.
The Checkbook Control IRA-LLC is a company. The company is authorized by whatever state you worked with originally. The things you will be responsible for can vary widely. For instance, following is a list of some items suggested by the state of Colorado. Of course this is only a partial list, and due to the limited activity in most Checkbook IRA-LLCs, some of these might not apply. Check your state's rules and regulations.
Again, this list is partial and specific to Colorado. Be aware of the requirements of owning a company. Furthermore, as a self-directed retirement asset, your IRA custodian will require annual fair market valuations of assets owned by the LLC. Your custodian must report these values to the IRS to maintain compliance.
The services vary widely based on the vendor you select to set up the LLC, but usually what you are buying is assistance in creating the entity itself. Most companies charge you up-front to start-up then leave you alone. For on-going running of the business and maintaining the viability of the entity, you will have to arrange for that yourself.
Entering into a prohibited transaction, such as providing goods or services to your IRA-owned LLC or making loans, advances or other transactions with your IRA-owned asset, will result in your self-directed IRA being distributed to you as of January 1st of that year. Distribution results in you having to pay income tax and/or penalties and interest on the amount distributed. The penalties and interest can potentially go back multiple years.
The rules and laws don’t specifically cover all details of these types of arrangements. Some activities that the IRA-LLC promoters encourage have not been fully tested by the courts nor formally allowed by the Internal Revenue Code or Department of Labor. In the future, the courts or federal authorities could declare that these activities are not allowed. And that could easily put you in the position of having committed a prohibited transaction even though you thought you were following the rules.