When you establish a Self-Directed Checkbook IRA, what does the arrangement look like—and how might it help you become a better retirement investor? Too many investors are thrown off by the idea of the complexity of a Checkbook IRA—that it will take too much time to set up and manage once you have established it. But once you get a clearer idea of how it works—and how it might fit into your retirement investment strategy—it will help demystify the process. Here’s what you will need to know.
How the Self-Directed Checkbook IRA Process Works
Think of it as an account within an account. It starts with a Single Member LLC. This is the entity you will establish early on—in accordance with your state’s laws—to ensure that you’ll have checkbook control. When you write a check, the money will come from the Single Member LLC’s bank account. This Single Member LLC is then held by the IRA, which means that you don’t technically own the LLC—your retirement account does.
It’s this subtle distinction that makes it possible to make quick retirement investments with a Single Member LLC as held within a Self-Directed IRA. Once your IRA holds this Single Member LLC, you then hold “checkbook control.” By investing on behalf of the LLC, you can then bring in assets to the LLC that are then held within the umbrella of the IRA.
Because a Self-Directed IRA allows you to invest in nontraditional assets like real estate and private companies, the value of the LLC is then held with the tax protections of an IRA. That allows any growth in your LLC to happen tax-free. The end result is that you’re able to make flexible, on-demand investments in many assets—while your IRA protects the LLC itself.
How Do You Use a Self-Directed Checkbook IRA to Invest?
The first part can be the most difficult. You will need to establish a Single Member LLC that your IRA then owns. Because establishing an LLC can be a bit complex, this is one reason why the fees associated with a Self-Directed Checkbook IRA tend to be front-loaded. If you consult a Self-Directed IRA administration firm to help, much of the work happens at the beginning. This includes making sure that your LLC meets all of the guidelines present in your state laws.
Your IRA can become the owner of the Single Member LLC, which technically separates the Single Member LLC from your personal investments. However, because you’re the one who controls the IRA, you will have checkbook control over the Single Member LLC. With this checkbook control, you can quickly buy up investments simply by writing a check. Those investments then fall under your LLC, which in turn is protected by the IRA.
The Advantages of a Self-Directed Checkbook IRA
Once you understand how the Self-Directed Checkbook IRA works and you establish one for yourself, you will be free to begin exploring. One chief advantage of the Checkbook IRA is that once you’ve established this arrangement, you will have a relatively low-maintenance way to make retirement investments. Using the Checkbook IRA, you can purchase nontraditional assets to be held within the LLC, which in turn is held through the IRA. That means that you can identify an investment and purchase it with ease when need be.
That is not to say that a Self-Directed Checkbook IRA is without risks. You will want to stay on top of all tax issues, accounting issues, and work with a trustworthy administration firm when establishing the LLC according to your state’s laws. You will also want to be clear about the limits of the IRA. But when you know these limits, a Checkbook IRA can make retirement investing much more intuitive.