Self-Directed IRA w/ Checkbook Control: Should You Do It?


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There are many instances in life where only the good parts of a situation are discussed on end and the not-so-good parts are left entirely out of the equation. When it comes to personal finances, especially your retirement plans, it is best to consider all aspects of the equation.

One such situation that needs to be review carefully concerns the retirement savings account known as the Self-Directed IRA which is often used as an investment vehicle in real estate.  There are companies which advertise Self-Directed with Checkbook Control. This type of account gives the managing member/IRA owner involved in an LLC the ability to directly write checks from the fun for investment purchases without having to consult the custodian of the plan.

Drawback for Checkbook Control

The ability for an IRA owner to write checks on their own behalf is an issue of concern when it comes to plan custodians, IRA regulators, and for other professionals that work with customers who have utilized the checkbook control methods. Many consider there is too much risk for the IRA owner. When the experienced custodian is no longer part of the process, there is the potential for stiff penalties and the eventual invalidation of the IRA account.

There are situations where LLCs can be of value in IRA investment situations. If multiple investors are participating in a single deal, having an LLC can help with the acquisition and disposition of the fund assets. Because a single member of the LLC known as the managing member has the authority to sign off on all documentation relating the fund on behalf of the other members, it can make things more convenient.

Another advantage to an LLC is that there is a protected veil surrounding it in the sense that creditors will not be able to access the assets within. For investors, the loss of their stake in the LLC is about as much as they can lose. There is no concern for losing personal assets or the remaining IRA assets in the account.

If you have pondered the pros and cons of checkbook control for your investments, be sure it is something you are really prepared to handle. In many cases, sticking with an experienced custodian is ideally a better move.

It is also worthy to note that investing through a LLC or other legal entity can be significantly more costly to form. There is the potential for fees to add up to over $5000. There will also be costs associated with paying tax professionals so you can properly file state and federal taxes as well as keep up with accurate accounting. In many situations, there are even more expenses where you’d have to pay for basic information when you have a question. Most custodians are happy and available to answer your questions, even the more technical ones, at no cost to you.

There have been reports that the regulators of the IRA as well as the IRS may begin analyzing investors that use this strategy for funding IRA investments. It is wise to research the specifics about the LLC with Checkbook control option before making your final decision concerning how you invest. The regulations and the process can be overwhelming but education is necessary in order to stay in compliance of the law while at the same time protecting the future financial stability of your retirement years.

Paul Sundin

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