Managing Your 'Checkbook Control' IRA Means Ditching The Custodian

Among the many different kinds of IRAs that you can now open, add a self-directed IRA with full checkbook control. What is that, you ask? Traditional self-directed IRAs require that you run all investments through a custodian. Real estate and others who want to control their financial destiny can opt for a self-directed checkbook control IRA and bypass that requirement—saving themselves thousands of dollars in custodian fees and

How Self-Directed IRAs with Checkbook Control Work

For holders of a traditional IRA account, the process includes the extra step of directing the custodian to execute a specific transaction. Not only does this cost money (custodian fees), but it also delays the transaction.

With checkbook control, you are essentially the manager of the account and take over some of the responsibilities of the custodian. You can immediately use your IRA LLC bank account to invest in stocks, bonds, real estate, precious metals, tax liens, and cryptocurrencies. You do not need the consent of a custodian to execute any of these transactions.

What you are doing is using a business structure that is owned by the IRA to execute transactions. In this case, the entity is an LLC. Since you are authorized to act on behalf of that entity, you essentially have complete control of your IRA.

Legalities of Establishing an LLC for IRAs

The IRS is not enthusiastic about allowing individuals this kind of autonomy over their self-directed IRAs. Nonetheless, when they attempted to pursue the matter in court to stop the practice, they lost the case. The decision was later upheld in 2013. The question at the center of the lawsuit was whether or not using an LLC managed by a beneficiary to execute trades was a prohibited transaction. So long as the transaction does not violate any of the other IRS restrictions on prohibited transactions, it is not in violation of any of tax codes that the IRS enforces.

How Checkbook Control Works

With checkbook control, using your IRA to invest is as easy as writing a check. You will not need custodian approval to purchase real estate, invest in precious metals, execute trades on stocks, bonds, or mutual funds, or even buy cryptocurrencies.

Essentially, your IRA funds will be held in a bank account in the name of the IRA LLC. As a manager of the LLC, you are authorized to perform transactions on behalf of the IRA. While custodianship still resides with whoever has set up your IRA, this allows you to perform the most important duties of the custodian without either their action or consent.

The Benefits of Checkbook Control

There are a number of advantages of establishing an LLC to execute transactions. Firstly, you retain all the tax advantages that an IRA has. Secondly, because it is a self-directed IRA, you have more options in terms of investment. Lastly, because you are authorized to write checks on behalf of the IRA LLC, you don’t have to go through the middleman (the custodian) in order to execute these transactions.

Essentially, you have more power over your own IRA than any other form of IRA would afford you. This includes the ability to:

  • Purchase non-traditional investments like real estate using your IRA
  • Purchase foreclosures and tax liens on the spot
  • Purchase vacation properties to rent and then retire there
  • Diversify your retirement investments
  • Shield your retirement assets from creditors

Caveat Emptor

While having the ultimate power over your IRA is indeed a serious advantage, you don’t want to trigger any of the IRA's prohibited transactions. This includes not cutting checks to your own businesses, buying real estate that you or your family occupy, or purchasing anything with IRA funds that the IRS expressly prohibits.

Any transaction that is flagged by the IRS can open you up to the forfeiture of your IRA. The IRS will consider the funds held therein to be distributed. You will be immediately required to pay taxes on the entire contents of the IRA. You will be charged a 10% penalty for early withdrawal. You can also be subject to capital gains tax.

While checkbook control using an IRA LLC gives you unprecedented power, you will want to be aware of the restrictions that apply to enjoying tax-deferred status. In other words, be aware of what you buy. If you are in doubt, contact the advice of a trusted tax attorney or financial advisor.

Last Updated: 
April 22, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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