What is a Checkbook IRA?

The term Checkbook IRA which has become a very popular tool refers to an LLC created by an IRA for investing purposes. This relatively new concept has grown out of investors’ desire to self direct their IRA assets from traditional brokerage or bank accounts into hard assets like real estate, metals – even an operating business.  

The range of options for IRA investment is almost limitless. There are strict laws concerning IRA accounts that must be complied with. However, if you are careful, the flexibility of a self-directed IRA can provide many benefits for you and your family for years to come.

To put the Checkbook IRA into context, we should start by discussing the self-directed IRA. Self-directed refers to the right that you have to “direct” your IRA investments into a long list of options that are not available at a bank or brokerage firm. Owning these nontraditional assets in an IRA account involves using a third-party custodian or trust company. This can be cumbersome if you need to act fast or have multiple assets in your IRA.  

The beauty of the Checkbook IRA is that you literally have a checkbook from which you can invest your IRA assets without having your custodian initiate each one. Here is how it works:

  1. You open an account at an independent IRA company (there are dozens), then transfer some cash into it.
  2. You form an LLC with the IRA cash where the IRA is the ONLY member of the LLC.
  3. Once the LLC is established you may then invest in whatever you wish by writing a check out of the LLC bank account.
  4. Each year, you report the estimated value of the LLC’s assets to the custodian.

There are some restrictions on where you can invest, but most of these restrictions can be dealt with using common sense. For example, you cannot buy a rental property with IRA funds and live in it. The companies who form IRA LLC’s can provide guidance on the do’s and don’ts.  Be aware that if you violate the IRA rules, the IRS may deem that the IRA is no longer an IRA and the entire balance is subject to income taxes, penalties, and interest.  

If you have questions about this article or IRA account in general, contact me at david@pcfo.net.

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