The Truth About “Checkbook Control” Over a Self-Directed IRA

Estimated reading time: 3 minutes(Last Updated On: November 30, 2018)

You’ll hear a lot of things when you start researching the self-directed IRA as a way to save towards your retirement. Some of these things will be true, some will be questionable and others will be flat out wrong.

The basic elements of a self-directed IRA are beyond dispute. A self-directed IRA can be setup either as a traditional IRA or a Roth IRA, and the type you choose will determine your rights and obligations with respect to contribution limits and tax deductibility.

Having a self-directed IRA will enable you to invest in the many asset types that are legally permitted, but which traditional IRA custodians (such as banks, credit unions and investment brokerages) do not allow. Permitted investment types include investments in real estate, making mortgage and other loans to other individuals, buying businesses, purchasing tax liens and making private equity investments.

But one aspect of self-directed IRA is that some custodians handle differently the ability to exercise “checkbook control” over your account (also known as checkbook LLC or checkbook IRAs). According to some IRA custodians, the process for setting up this type of account is as follows: the account holder directs their custodian to use funds from the IRA to purchase all of the units of a new LLC that the account holder creates, the LLC opens a checking account and deposits the funds it received from the investment by the IRA, and the account holder now has the ability to use the LLC’s checking account to make investments. The primary selling point of this structure is that the account holder can make investments quickly, without having to involve the custodian.

Unfortunately, the legal basis for checkbook control IRA isn’t one that’s explicitly set forth in the IRS regulations. Rather, self-directed IRA custodians who offer checkbook control over retirement accounts have to rely on an aggressive (some might say overly aggressive or perhaps even unreasonable) interpretation of a single enforcement case. Because the legal basis for a “checkbook control” IRA is so uncertain, individuals who pursue this type of structure are risking the integrity of the account and even its tax status. If the IRS ever issues a clear but unfavorable pronouncement about these types of IRAs, the account holders could be faced with significant penalties and tax liabilities.

Perhaps more importantly, the supposed need for checkbook control over an IRA account is based on a faulty assumption – that there’s necessarily a need for that type of access to IRA funds in the first place. Most investors take a long term investment outlook with their IRA funds, so the ability to put their account funds to work on a day’s notice is not important. Furthermore, retirements savers can choose a self-directed IRA custodian who responds quickly to their investment directives, and eliminate the need for checkbook control.

Even if you choose to take an aggressive position with your IRA investments, don’t try to push the envelope with respect to your account structure. It is prudent to stay away from self-directed IRAs that promise you checkbook control over your funds.

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