Holding checkbook power with an IRA—the ability to make a retirement investment as quickly as writing a check—has appeal for those who hate too much red tape. But does it actually help you retire? The possibilities are endless when you use a Self-Directed IRA with checkbook control to make retirement investments, but it also helps to know how this arrangement might suit your individual investment style:
How to Use a Self-Directed Checkbook IRA Properly
It all starts with making sure that you understand the structure of the Self-Directed Checkbook IRA—and how to establish one of your own. In a Checkbook IRA, you will use a Single Member LLC within a Self-Directed IRA. This Single Member LLC is established in accordance with the rules and regulations of your state, which is why we cannot give universal advice on how this will work for you—you will want to consult with a Self-Directed IRA administration firm to make sure that everything is done properly from the beginning.
Your IRA will then own 100% of the Single Member LLC. That means that you do not technically own the LLC. You own the account that owns the LLC. This may seem like a subtle piece of financial wizardry, but it’s perhaps one of the most important points in the Checkbook IRA arrangement: your LLC becomes a retirement investment.
From there, you will be able to make the checkbook decisions on behalf of the LLC. Investments you make within the LLC then fall under the umbrella of your IRA, allowing you to quickly make retirement investments with a signature.
How a Self-Directed Checkbook IRA Helps You Retire
Why might an arrangement like the one you just read help you retire any faster than another strategy? It does not, on its face. Simply having a Self-Directed Checkbook IRA is not enough, just as having a brokerage account is not enough to make money in the stock market. You have to make sure that you know how to use this account properly.
With a Self-Directed Checkbook IRA, the primary advantage (in addition to the speed with which you can carry out transactions) is that you will open your retirement portfolio to a wide range of investment types. Rather than focus exclusively on stocks, you will be able to make investments in real estate, precious metals, tax liens, and more. In fact, the IRS prohibits the specific items that Self-Directed IRA investors cannot make with an IRA. This provides a lot of freedom.
This can allow people with experience in a specific type of investing—such as real estate investing—to leverage the protections of a retirement account with their existing expertise. Rather than forcing themselves to become an expert stock or fund picker, an investor can focus on an asset class that’s more to their liking. A Self-Directed Checkbook IRA makes that possible with a greater degree of control and efficiency.
To Whom is the Self-Directed Checkbook IRA Suited?
That leaves us with one question: what type of investor is ideal for the Self-Directed Checkbook IRA strategy? Generally, it may refer to any investor with plenty of thoughts on investing—who has an independent streak and does not want a lot of paperwork to get in the way of making a timely investment. Although there is a substantial amount of paperwork for a Checkbook IRA upfront, investors can use this arrangement for more long-term efficiency. Once the account is properly set up, the investor has a lot of wiggle room for making investments and managing the LLC. The question is how much responsibility the investor is willing to take on, and how comfortable they are with a unique financial arrangement for these specific benefits.