The Quirks of Opening a Checkbook IRA
The equation is simple. Use a Self-Directed IRA to own a Single Member LLC, which has a checking account. That checking account now belongs to your Self-Directed IRA. Opening a “Checkbook IRA” arrangement is probably the most flexible way to carry out investments within an IRA—after all, all you have to do is sign the proper check. But does this arrangement come with its unique quirks? It does. While many Checkbook IRA investments are content with these quirks, you’ll want to know them before you jump into a Checkbook IRA yourself.
Understand the Structure of a Checkbook IRA
As stated above, the structure is straightforward: your Self-Directed IRA owns a Single Member LLC, which has its own checking account. From there, the IRA holds the LLC, and the LLC holds the checking account. This setup means you control what goes into your retirement account with the stroke of a pen.
One of the most notable quirks is the need to document every transaction. While it’s true that you’ll have check-writing access to your IRA funds, you have to ensure that all transactions are documented properly. Any investment you make with your Checkbook IRA has to be in line with IRS regulations. That means no personal use of the funds, no self-dealing, and no investments that could benefit you or close family members directly.
Managing the Administrative Tasks
Even though the concept of a Checkbook IRA seems like a hands-off approach, it does come with its share of administrative tasks. As the owner of the LLC, you’ll need to keep track of everything—from initial setup and maintenance to ongoing investments. The responsibility falls on your shoulders to ensure that the LLC stays compliant with IRS rules. It’s a common theme with investing: more ownership, more responsibility.
You won’t be dealing with a custodian in the same way as a traditional Self-Directed IRA, but that doesn’t mean you can ignore IRS requirements. Record-keeping, filing annual forms, and ensuring that your investments fall within the allowable categories will all be part of your ongoing responsibilities. While the idea of being the “banker” of your IRA is appealing, you’ll have to stay organized and meticulous about your documentation.
The Risks of DIY IRA Investing
It’s easy to get excited about the freedom a Checkbook IRA offers, true. But don’t forget about the risks, either. Without a custodian overseeing the account, there’s less oversight, and that can lead to mistakes. One common risk is making investments that aren’t IRS-compliant, which could lead to penalties or disqualification of your IRA.
Another risk is the potential for unrelated business taxable income (UBTI). If your Checkbook IRA invests in a business or any activity that generates UBTI, you may find yourself responsible for paying taxes on that income. Since you’re managing your IRA independently, you won’t have a custodian flagging those issues for you.
Is a Checkbook IRA Right for You?
A Checkbook IRA does offer plenty of flexibility and control. If you’re the type of person who enjoys handling the details of your investments and you’re comfortable keeping track of all the documentation, it could be an excellent fit. But you may need some assistance from your Self-Directed IRA administration firm if you have further questions.
Before you jump into a Checkbook IRA, take the time to weigh the pros and cons and consider whether you’re ready for the added responsibility. If you choose to move forward, staying organized and informed will be key to ensuring a smooth experience. Give us at TurnKey a call at 844-8876-IRA (472) to find out more.
Imagine a life where your retirement investments feel as easy to make as any other investment. Sure, rules are separating the two, but once you have a Checkbook IRA in place, you’d be surprised how natural it can feel to make retirement investments. Interested in learning more? Contact TurnKey IRA at 844-8876-IRA (472) for a free consultation. Download our free guide or visit us online at www.turnkeyira.com.
