You may already know that a Checkbook IRA can be the most flexible way to invest retirement funds. With the stroke of a pen, you can put retirement funds into assets other retirement investors might not have access to. But with freedom comes some risk. If you’re managing your own account, you need to know the rules and regulations of Checkbook IRAs so you can avoid fines and penalties. After all—what’s the point of investing if your gains get erased by the penalties you could have simply avoided? Let’s look at what these mistakes might look like, and how you can avoid them when using your Checkbook IRA.

Understanding the Checkbook IRA Structure

At the heart of a Checkbook IRA is the Self-Directed IRA LLC. This is a limited liability company owned by your IRA. Once you establish the LLC, your IRA funds are transferred to the LLC’s bank account, giving you “checkbook control” over those assets. Simple! This means you can write checks or wire funds directly from the LLC’s account to make investments, bypassing the need for custodian approval for every transaction.

That’s what gets you the greater autonomy that comes with Checkbook IRA investing. But it’s not the end of the story.

Prohibited Transactions: A Common Pitfall of Self-Directed IRA Investors

When you have the freedom of a checkbook, a certain instinct kicks in. A checkbook! You can do whatever you want! Well, not exactly. It’s still the checkbook of your LLC, which belongs to your IRA. This means the rules of investing still fall under what you should expect from a retirement account.

The bad news is that you can’t invest in whatever you like with a Checkbook IRA. You can’t, for example, invest in collectibles such as art or wine and expect those to count as valid retirement assets. But the good news is that you can invest in far more than the traditional brokerage account might allow. Rather than solely opting for stocks or bonds, you can invest in real estate, private notes, and more. This is what gives you the flexibility to really stretch your Checkbook IRA muscles.

Rules of Thumb for Avoiding Prohibited Transactions

Now let’s dive down. What exactly is a prohibited transaction, and how can you avoid making one? A prohibited transaction is an invalid investment within retirement rules—and making one such investment can mean paying fines and penalties.

Prohibited transactions typically involve dealings with disqualified persons, which include you, your spouse, your lineal ascendants and descendants, and entities where you hold a significant interest. Examples of prohibited transactions include:

• Buying property for personal use: You can’t purchase real estate with your Checkbook IRA if you or a disqualified person will use it.
• Self-dealing: You can’t use IRA funds to benefit yourself directly or indirectly, such as selling property you own to your IRA.
• Providing goods or services to the IRA: You can’t be compensated for managing or servicing investments owned by your IRA.

Those rules aren’t so very limiting, are they? Once you understand where the boundaries are, it’s much easier to connect to your Checkbook IRA and focus on the retirement investments you can make without penalties. And once you understand these boundaries, you’re far likelier to build an account full of valid retirement investments that help you secure a prosperous future.

Want to know more? Ready to kickstart your Checkbook IRA? Reach out to us here at TurnKey IRA by dialing 844-8876-IRA (472) and we’ll be glad to talk to you about whether a Checkbook IRA is right for you.