Checkbook Control

Case Study: Checkbook Control

The following case study illustrates how to use checkbook control to invest in Real Estate with an Advanta IRA.

Anthony is a building contractor who wants to put his expertise to work to build retirement wealth by investing in real estate with an IRA. He understands how self-directed IRAs work, and that he can choose the investments for his account. He also knows that buying and selling real estate in an IRA avoids capital gains tax on the property sales, which allows capital to build in the account to reinvest and save for retirement.

Anthony Can Invest in Assets He Knows and Understands

He wants to invest in rehab-and-flips because he can use his expertise to identify promising investment property. But, because he’s the IRA owner, he’s not allowed to perform any of the renovations and repairs himself. The IRS considers that a prohibited transaction, so he must hire others to do this work and pay them with IRA funds. He also has to buy the materials and pay any other investment-related expense with IRA funds. Renovations projects typically incur multiple expenses depending on the scope of work that must be done to flip them for top dollar.

Anthony decides to use a checkbook IRA LLC that will give him fast and flexible access his IRA’s funds. These accounts are commonly called checkbook control IRAs because account owners can write checks directly from their IRA funds to buy investments and pay investment-related expenses. Account owners have immediate access to their IRA funds, so they can invest swiftly to score assets before their competition beats them to it. Anthony is confident that with his knowledge in the industry, he can accumulate a significant retirement nest egg investing in renovations in his IRA.

Anthony Takes Steps to Open a Checkbook IRA

  1. He opens and funds an Advanta IRA account by a rollover of $150,000 from an existing IRA and $200,000 from his former employer’s 401(k) plan.
  2. Anthony forms an LLC in the state of his choice.
    • He uses an attorney or legal service to file articles.
    • Articles of Organization name Anthony (or another individual) as manager of the LLC.
    • Articles of Organization filed with the state do not mention the IRA.
  1. Once the LLC is formed, Anthony must have an operating agreement drafted for the LLC. Within the operating agreement:
    • His IRA is listed as 100 percent owner/member of the LLC, listed as follows: Advanta IRA FBO Anthony Smith IRA #800123.
    • Anthony is named as the manager of the LLC.
  1. Anthony provides the operating agreement to Advanta IRA.
    • A representative of Advanta IRA signs the operating agreement on behalf of the IRA once Anthony has reviewed and approved the agreement.
    • Anthony signs the operating agreement in his position as LLC manager.
    • Advanta IRA issues check/wire from his IRA to fund the LLC.
    • Anthony opens a bank account in the name of the LLC and deposits funds from his IRA into the bank account.
  1. Now, Anthony is ready to find a property and invest.

 Buying the Investment Property

Anthony finds a desired rehab property for $200,000. He estimates renovation costs will be around $50,000, and he’s confident he can flip the house for $325,000. Anthony enters into a contract to buy the house.

  • He ensures the name of the LLC is listed as the buyer of the property.
  • As manager of the LLC, he reviews and signs all closing documents.
  • He writes checks to pay for the appraisal, closing costs, and the total cost of the property directly from the checkbook for his LLC bank account holding his IRA funds.

Operating the Checkbook LLC

  • Anthony uses the checkbook for the LLC to pay for a contractor. As the IRA owner, he can’t do this work himself.
  • He purchases all the materials needed for the renovation using checks from the LLC bank account.
  • He maintains accurate records on behalf of the LLC and his IRA relevant to the renovation expenses.

Selling the Property

It takes three months to complete the renovations and put the house on the market. Within a few weeks, the house sells for $325,000. The initial purchase price was $200,000, and Anthony was able to stick to his renovation budget of $50,000. So, the sale of the investment property generated a nice profit of $75,000. Anthony deposits the income into the LLC bank account.

He does not have to worry about paying capital gains on the sale. All income earned in this transaction falls under the tax-free (Roth IRA) or tax-deferred (traditional IRA) umbrella of his IRA. So, the profit belongs to his IRA, and reverts directly into his retirement plan. Within just a few months, Anthony earned $75,000 on this investment in his IRA. He can let that income build and compound in the account over time, or he use it as additional capital to invest in more real estate his IRA.