The concept of being able to write a check and make a retirement investment is foreign to many people. For many investors, retirement investment happens in an account or a 401(k). You make investments into that account and tell the money what to do. But in a Self-Directed Checkbook IRA, that’s all thrown on its head. Rather than choose from a limited amount of mutual funds, you’ll be able to make retirement investments with the power of a single checkbook. But how does this process work, and who does it most make sense for? Let’s explore.
How the Self-Directed Checkbook IRA Works
A Self-Directed Checkbook IRA is essentially a nickname for holding a Single Member LLC within a Self-Directed IRA. A Self-Directed IRA is simple: it’s a retirement account you use that allows plenty of freedom when it comes to non-traditional investments. By owning 100% of a Single Member LLC in a Self-Directed IRA, you essentially shift ownership of that LLC to your IRA. And since you control that IRA, you then control the checkbook.
Why does this appeal to some people? Because once you have the power of the checkbook, you’re then free to make retirement investments at the drop of a hat. Although the process for establishing a Single Member LLC and Self-Directed IRA is more involved than opening a traditional IRA, for example, in the long-term, this arrangement can actually be quite low maintenance. So long as you follow the rules and keep on top of your tax reporting requirements, a Single Member LLC in a Self-Directed IRA becomes an extremely simple, low-cost way to invest in retirement.
Who Should Have a Self-Directed Checkbook IRA?
We’re not suggesting that a Self-Directed Checkbook IRA is for everyone. For people who prefer a hands-off approach, a Checkbook IRA is essentially the opposite of what they want: it gives you a greater degree of control and freedom. Some investors don’t want that. They want a passive investment system that continues to put money away for them over the years. And if that’s your retirement strategy, it can work.
But a Self-Directed Checkbook IRA makes sense for people who like to take the reins. People who have experience investing in, say, real estate can use a Checkbook IRA to jump on opportunities. This allows them to build substantial wealth within an IRA, which in turn offers them amazing tax benefits. Having a substantial amount of wealth within an IRA means that you can keep your retirement investments separate and enjoy tax-free growth as the investments grow over time.
What are the Limits of a Self-Directed Checkbook IRA?
A Self-Directed Checkbook IRA is not a free pass to do whatever you like within a retirement account. The IRS still establishes rules for the types of investments you can make. However, what a Checkbook IRA does allow is that you can make legal investments quickly and effectively. The simple act of writing a check and having a retirement asset end up in your Single Member LLC is a powerful way to get things moving in your retirement strategy.
A Self-Directed Checkbook IRA is still susceptible to the same limits as any IRA. It’s not a magic wand. You’ll be expected to keep your retirement assets separate from your personal assets; for example, you wouldn’t transact with disqualified persons through a Checkbook IRA, since it still falls under the rules of the IRA.
But once you can understand these limits and what they mean for you, you’ll find that a Self-Directed Checkbook IRA can be a freeing way to invest in a retirement strategy that you control yourself. And for many investors, that makes sense.