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Checkbook Control 101


What Is Checkbook Control?

Checkbook is the term used when the IRA owner has total control over investment decisions and purchases.  It allows owners of self-directed IRAs to control the timing of making self-directed investments and fully control the disbursement of IRA funds to pay for the investments. Without checkbook control an IRA owner must go through the self-directed IRA custodian for prior approval and authorization to make investment purchases and decisions. In addition, most IRA custodians charge extra fees to review paperwork and make disbursements from your IRA account.

With checkbook control the IRA owner eliminates the cost, time, and need for authorization when making investment decisions and purchases. Checkbook control is the term used when the owner of the self-directed IRA has complete control over the funds in the IRA and all decision-making. While you do not need to establish checkbook control to get the benefits of a self-directed IRA,  most owners of Self-directed IRAs use them so that the owners do not have go through the IRA custodian to make investment decisions (see benefits of checkbook control below).

How Does It Work?

In order to obtain “checkbook control,” you must establish a “special purpose” LLC that is owned by your IRA, obtain a special purpose Operating Agreement, and obtain an EIN for the LLC. Because of the complexities involved and the severe penalties for getting it wrong, the Operating Agreement should be “attorney drafted” (some custodians require that the agreement be drafted by an attorney). Once you establish this new LLC, a business checking account will be set up in its name. You then transfer funds from your Self-directed IRA to the bank account of the LLC. Once the funds are in the LLC, you have complete control over the investments made and the management of the investments. You will be given a checkbook that is directly linked to that LLC account. You will then be in control of that checkbook, therefore gaining “checkbook control” over your self-directed IRA funds.

Benefits Of Having Checkbook Control

Immediate Access to Your IRA Funds

When you identify an investment that you want to purchase, you can just write a check or wire the funds. You don’t have to fill out paperwork, rely on your administrator to fund a purchase, or wait for someone else to write a check—you can take care of it yourself. This can be particularly helpful with investments that have time constraints, such as a real estate auction sale where funds are needed immediately to close the real estate purchase.

Eliminate Per Asset and Transaction Fees

Checkbook control can help you avoid the administrative and transaction fees that are typically associated with a self-directed IRA. Without an LLC your investments are held by your IRA and the custodian will charge you a fee for each asset held and for each transaction you make. With a self-directed IRA LLC the IRA only owns one asset -the LLC. Thus, you are only charged a fee for holding the LLC and not for each investment held by the LLC.

Note: While an IRA LLC structure will cost more to implement than simply opening an account with a custodian, most investors with a diverse portfolio will find that over time, they can save a considerable amount by using the checkbook IRA model.

Asset Protection

Using an LLC to hold assets provides protections not available through an IRA alone. The LLC entity affords limited liability protection to the owner of the LLC. If a lawsuit is filed related to a property held in an IRA LLC, the LLC would be the defendant, and the IRA as well as the IRA account holder would be shielded from claims or liability associated with the LLC.

If you use only an IRA to hold your investment assets, and if the IRA assets were not sufficient to satisfy the judgement against the IRA, the courts have determined that the IRA account holder’s personal assets may be subject to claims.

Tax Deferral

With the Self-Directed IRA LLC structure, all income and gains from investments will generally flow back to your Self-Directed IRA tax-free. Because an LLC is treated as a pass-through entity for federal income tax purposes, all income and gains of the LLC will generally flow-through to the IRA tax-free!

More than One Investor

If the investment will be made by more than one IRA (whether another IRA or an outside person), the use of an LLC is the most effective way to coordinate and manage ownership interests, division of income and distributions, and manage business decisions.

Keep Your Capital Working

With any self-directed IRA portfolio, you are likely to have two types of potentially idle capital: contingency reserves and new income from investments. Because you have full control over your plan, and the ability to invest in absolutely anything the IRS rules allow, you can easily keep all the capital in your IRA LLC deployed rather than leave these funds in cash.

You can keep things simple and just have a savings account for the LLC, or perhaps put some portion of the LLC funds in short-term CD’s.

If you want to get more sophisticated, you can open a brokerage trading account in the name of the LLC, then take the rental income from an IRA-owned property and invest that into shares of your favorite stock or mutual fund. If you have both bank and brokerage accounts within the IRA LLC, you can simply move funds between these accounts without need for special processing or reporting.

 

Most custodian managed self-directed IRA plans cannot provide this kind of flexibility or have rather cumbersome and expensive methodologies for keeping idle capital deployed in conventional financial products.

Keep Your Capital Working

With any self-directed IRA portfolio, you are likely to have two types of potentially idle capital: contingency reserves and new income from investments. Because you have full control over your plan, and the ability to invest in absolutely anything the IRS rules allow, you can easily keep all of the capital in your IRA LLC deployed rather than leave these funds in cash.

You can keep things simple and just have a savings account for the LLC, or perhaps put some portion of the LLC funds in short-term CD’s. When it comes to contingency funds, something that is reasonably safe and easy to liquidate is best.

If you want to get more sophisticated, you can open a brokerage trading account in the name of the LLC, then take the rental income from an IRA-owned property and invest that into shares of your favorite stock or mutual fund. If you have both bank and brokerage accounts within the IRA LLC, you can simply move funds between these accounts without need for special processing or reporting.

Most custodian managed self-directed IRA plans cannot provide this kind of flexibility or have rather cumbersome and expensive methodologies for keeping idle capital deployed in conventional financial products.

Services IRA Village Provides

The primary benefit IRA Village offers is to provide an attorney drafted Operating Agreement and LLC formation  all online at a fraction of the costs charged by attorneys. Our Operating Agreements are of the same quality you would receive if drafted manually in our affiliated law firm.

To establish checkbook control with your LLC and bank account you will need AND IRA VILLAGE PROVIDES the following (all online):

  1. An Operating Agreement. Your self-directed IRA custodian will require this as well as most banks to open a bank account. The agreement should be drafted to account for the complicated rules applicable to IRAs.
  2. Official state document establishing the LLC. Most states refer to this as Articles of Organization (but in some states it is also called certificate of formation or certificate of organization).
  3. The tax identification number for the LLC (the “EIN”).

Conclusion

With a Self-directed IRA LLC with “Checkbook Control”, you, as manager of the IRA LLC, can act quickly on a great investment opportunity. With a Self-directed IRA LLC, when you find an investment that you want to make with your IRA funds, simply write a check or wire the funds straight from your LLC bank account to make the investment. The Self-directed IRA LLC allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself with lower costs charged by the IRA custodian.

Once your self-directed IRA custodial account is open and funded, with our service you can have your Operating Agreement immediately and your fully established LLC within a few days.  Our team of specialists are committed to being with you at every step of the process. In addition, we offer access to tax attorneys through our affiliated law firm to answer any basic legal questions you may have.

I had been wanting to do this but was afraid that it would be too costly or complicated. This site answered all questions and I was able to communicate directly with an attorney. Thank you!

Patrice, Atlanta, GA

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