What is a Self-Directed Checkbook IRA, and why do some retirement investors need to have control over a checkbook of an LLC? It all comes down to how the Self-Directed IRA works. In a Self-Directed IRA, an investor can turn to non-traditional retirement assets—such as owning a Single Member LLC or owning real estate—to build wealth. The protections of the IRA allow investors to build wealth while minimizing their tax obligations.
But like any action that legally minimizes your tax obligations, there is intense scrutiny here—and for good reason. That’s why it’s essential that you understand how a Self-Directed Checkbook IRA works before you consider one yourself.
How Does a Self-Directed Checkbook IRA Work?
The idea itself is fairly simple: your IRA owns an LLC—and you, in turn, are able to exercise checkbook control. Although the IRA itself is what technically owns the LLC, this will be a Single Member LLC—in other words, your IRA is the sole owner. And since there’s no one else in this pipeline but you, you’ll be able to exercise checkbook control over the LLC.
This allows you to make checkbook decisions for the LLC. That might include making an investment with the LLC. And because the LLC is owned by the IRA, these investments would fall under the purview of your IRA.
The setup is simple. But the implications can sometimes be a little complicated. It helps to have someone on your side who understands what it takes to establish a Single Member LLC (a necessary step in the creation of a Self-Directed IRA for checkbook control of an LLC). This typically means more upfront costs associated with establishing the LLC in a way that helps you exercise more freedom and control over your retirement investments. But the payoff is the long-term maintenance is much easier and simpler once it’s been established properly.
What Do You Need to Know Before Trying a Self-Directed Checkbook IRA?
With all that in mind, what should an investor be aware of before they consider trying a Self-Directed Checkbook IRA? Here are some of the essentials:
- Oversee the entity documents. The creation of your Self-Directed Checkbook IRA’s setup is crucial. You have to make sure that the Single Member LLC is within the regulations of your state’s laws, for example. There are organizations that can help with this during the early setup, which is why the initial portion of a Checkbook IRA tends to have higher fees than most account setups. Many investors choose this because they prefer the lower maintenance fees that come with managing the checkbook control themselves.
- LLC distributions go to your IRA. Because the IRA owns your LLC, you cannot take money directly from the LLC. You technically don’t own it. Your IRA does. And because you own the IRA that owns the LLC, you will have options. However, money flowing from your IRA will be subject to IRS rules, such as taxes and penalties on early withdrawals. Do not put money you might need liquid within an LLC that you hold within an IRA, as the IRA funds are intended to stay in the IRA while your retirement investments grow.
- You must keep things legal. There’s a lot of responsibility that comes with managing an arrangement like this yourself. It will be up to you to ensure that the actions you take with your Self-Directed Checkbook IRA are legal and within the bounds of retirement regulations, as per the IRS.
The Self-Directed Checkbook IRA might seem like an overly complicated arrangement, but its goal is more simplicity and flexibility. That said, investors should understand all the ins and outs before getting started.