“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 a strategy that affords the account holder a different type of control over the disbursement of his or her tax-advantaged retirement dollars.
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 (from a 401(k) to a Traditional IRA, for example).
- 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 the IRA custodian does not review every individual transaction.
- UBIT may still apply – The assets may be owned by the LLC, 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 pass-through 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, thus necessitating the valuation process on the part of the IRA holder.
As an education-based Checkbook IRA custodian, New Direction Trust Company is happy to assist with any questions or concerns you may have. Please don’t hesitate to give us a call at 877-742-1270 or send us an e-mail at firstname.lastname@example.org to further discuss Checkbook IRAs.