Checkbook IRAs present a powerful investing strategy that make it easy for account owners to invest in alternative assets. Account owners form what’s called a single-member LLC, and your IRA operates under the umbrella of that LLC. These structures provide more flexible investing power than typical self-directed IRAs. You’re able to write checks directly from IRA funds that are placed in a bank account opened in the name of the LLC for this purpose.
Here Are the Top 3 Reasons People Use Checkbook IRAs
- You have immediate access to investing capital.
Because you can write checks directly from your IRA-funded bank account, you 
can invest quickly and seamlessly. You cut out the middleman (your IRA custodian or administrator) and don’t have to wait for them to initiate and complete the investing process. This allows you to snap up assets quickly (like at an auction), before your competition can.
- You choose the assets for your IRA.
Checkbook IRAs give account owners absolute freedom to invest in assets they know and understand. This means, you can invest in things besides stocks and bonds. There are thousands of alternative investments you can use to help build your retirement wealth. And, when you have a better than average understanding of your investments, you can make critical buy-or-sell decisions that can significantly impact the ROI in your account—and you can act on those decisions immediately.
Common investments in checkbook IRAs include:
- Real estate (commercial, residential, improved and unimproved land)
- Tax certificates and deeds
- Rehab-and-flip property
- Multifamily homes
- Any other IRA-permissible asset you choose
- You can pay investment related expenses with ease.
If you invest in multiple properties or other check and deposit-intensive assets like renovations, having a checkbook IRA is a big bonus. You can easily pay expenses for the assets, on a timely basis. You don’t have to submit a pay request to your IRA custodian or administrator to cut the checks for expenses and other qualified payments your relevant to the IRA-owned asset. You write the checks yourself from your IRA/LLC bank account.
Certain IRS Restrictions Apply
Of course, there are limitations and regulations the IRS has for checkbook IRAs (that apply to all retirement plans).
You’re unable to make a distribution to yourself. It may seem tempting, but don’t write a check to yourself for any reason. You can’t reimburse yourself from IRA funds for personal expenses you may have incurred relevant to investments in your account. You must still go through the proper channels to take distributions in retirement. Early distributions are subject to a 10 percent penalty on top of the taxes you’ll owe on the money taken from your IRA.
You can’t draw a salary from your IRA funds. Even though you can appoint yourself as manager of the LLC, you’re prohibited from paying yourself for that “job.” Again, funds generated by your IRA account are meant to benefit you only in retirement and not before.
You are responsible for your own due diligence. It’s important to research your investment thoroughly to make sure the asset is viable and also to avoid fraud. Additionally, you must ensure you don’t invest in assets prohibited by the IRS. Per IRC 4975, your checkbook IRA may not invest in life insurance, collectibles, or works of art.
Your IRA must avoid prohibited transactions. Your IRA is not allowed to do business with disqualified persons (you, your spouse, your parents and grandparents, your children and their spouses). For example, your IRA can’t rent or sell a home it owns to your son and his wife.
Failure to comply to some or all of the above rules can result in penalties, taxation, and even disqualification of your account. We recommend you consult with a trusted tax professional to help you navigate the complexities of your checkbook IRA LLC to ensure you operate within IRS regulations.
For more information, please contact Advanta IRA. Many of our clients enjoy the benefits of checkbook IRAs, and we are happy to explain how these investment structures work in more detail to help you determine if this strategy is the right one for you.
