What Is a Checkbook IRA & How Does Checkbook Control Work?

What Is a Checkbook IRA?

A checkbook IRA is the common name for an account structure involving an LLC that gives IRA owners checkbook control over their retirement funds. The IRA forms a single-member LLC, which opens a bank account and funds the account with capital from the IRA. This transaction is not considered a withdrawal of retirement funds, as the LLC works within the tax-sheltered umbrella of the IRA to invest. Investments are technically owned by the IRA, and investment gains accrue in the IRA on a tax-free or tax-deferred basis.

The IRA LLC gives the account owner checkbook control—the power to write checks directly from their retirement funds to invest. This signing authority strictly applies to the purchase of investments for the account and/or paying bills related to IRA-owned assets.

A checkbook IRA falls into the self-directed retirement plan category. Self-directed IRA owners have complete control over their retirement funds and investment decisions. Account owners also invest in a wide variety of alternative assets, like real estate, private equity, private lending, gold, bitcoin, and much more. Checkbook IRAs further empower account owners to invest quickly and confidently with easy access to investment capital.

Watch this video to learn more about checkbook IRAs.

How Does Checkbook Control Work?

Checkbook control offers 3 key advantages:

  • Invest quickly in assets such as real estate. You write a check or wire funds directly from the account to invest instead of coordinating with your self-directed IRA administrator make the investment. This makes it easier to invest ahead of your competition or in time-sensitive situations like acquiring tax liens and deeds.
  • Make deposits and pay bills related to assets in your plan. This also saves time, as you make deposits and pay bills directly to and from your account instead of submitting bills to your plan administrator perform these transactions.
  • Avoid investment transaction fees in your self-directed IRA. Checkbook IRAs are created using a single-member LLC, which is considered one asset in your plan. Even though the LLC can invest in multiple assets, typical self-directed IRA service providers apply transaction fees to the LLC as a single asset. However, some administrative fees may vary with different service providers.

How Do I Set Up a Checkbook IRA?

There are a few steps to create an IRA LLC:

  1. Your IRA sets up a single-member LLC and name the IRA as its only member.
  2. You appoint yourself as the manager of that LLC.
  3. As a business entity, the LLC opens a bank account.
  4. You move funds from your IRA into the bank account. Again, this is not a taxable event provided you use of those funds for investments or expenses related to the investment (such as property tax, maintenance, repairs, etc.).
  5. Write checks or wire funds from the bank account to pay for investments.
  6. Follow rules that apply to checkbook IRAs.

The Freedom of Checkbook Control Comes with Greater Responsibility

When you self-direct your IRA or 401(k) and choose your own investments, you are responsible for performing due diligence before you invest. And, it is important you understand how to avoid investments that involve prohibited transactions with disqualified persons.

What to consider when setting up and using IRA LLCs

As a self-directed IRA services provider, Advanta IRA holds the LLC membership interest, but Advanta IRA does not set up the LLC. You should consult with an accountant or tax professional to ensure proper structure and maintenance of the LLC. Additionally:

  • Rules for LLCs are different in each state. Learn the rules that govern LLCs in your state, including potential taxes, fees, and registration and recordkeeping requirements.
  • Although many IRA owners appoint themselves as manager of the LLC, you can appoint a third-party.
  • If you appoint yourself as the manager, you are unable to pay yourself for these services. A third-party manager is allowed payment for their services.
  • The LLC manager is responsible for maintaining accurate records in compliance with LLC rules as well as IRA regulations.
  • You are unable to write checks to yourself from the IRA LLC funds. This is considered a distribution, which is taxable event and carries a penalty, as well.
  • You must also be familiar with IRS rules for disqualified persons and prohibited transactions regarding IRAs.

Advanta IRA’s Role with Checkbook IRAs

As one of the nation’s elite self-directed IRA service providers, we tend to the administrative details of your IRA so you can spend your time looking for investments.

Our role is to provide client support for your self-directed IRA to help you set up and maintain that account in compliance with IRS rules and regulations. We do not provide investment, legal, or tax advice. We do not sell, set up, or provide service for LLCs. We highly recommend you enlist the help of a tax and/or financial professional familiar with IRA LLCs to assist you in the proper setup of your LLC.

If you’d like to learn more about how you can take control of your own retirement funds and investing decisions, contact Advanta IRA today.

Learn More About Checkbook IRAs