What is a Self-Directed IRA?

Many “traditional IRA” custodians advertise themselves as offering a Self Directed IRA, but what that really means is that you will need their approval any pay transaction fees each time you make an investment. Whereas, in the case of a Self-Directed IRA LLC, also known as a “checkbook control” Self-Directed IRA LLC, a limited liability company (“LLC”) is established that is owned by the IRA account and managed by the IRA account holder (you). The Custodian then transfers the IRA Holder’s IRA funds to the LLC’s bank account providing the IRA holder with “checkbook control” over his or her IRA funds from the convenience of a local bank account.

A self-directed IRA is a type of IRA structure that allows the IRA holder (you) to have more control over your retirement funds. Unknown to some, not all self-directed IRAs are the same. It is well known that the IRS allows you to use your IRA to make traditional investments, such as stocks and mutual funds, it is not as well known that the IRS also allows you to use IRA funds to make real estate, precious metals, tax liens, private business and much more tax-free and penalty free! In fact, the IRS only prescribes a few restrictions on the type of investments that can made using IRA funds.

Types of Self-Directed IRA Accounts

There are essentially three types of Self-Directed IRAs:

1. Financial Institution Offered Self-Directed IRA

The most popular Self-Directed IRA account offered is the financial institution Self-Directed IRA. The reason that this type of Self-Directed IRA is so popular is because generally offered by the major financial institutions, such as Bank of America, Wells Fargo, Fidelity, Vanguard, etc. With this type of Self-Directed IRA, the IRA holder is generally able to only make IRA investments offered by the financial institution which typically only includes financial relates investments, such as stock, mutual funds, and ETFs. Even though these types of IRA accounts are called “Self-Directed IRA” accounts that are very limited in their investment scope and do not allow IRA investors to make any non-traditional investments, such as real estate.

Why do the financial institutions limits the investment options available?

A financial institution that offers IRA accounts is not required to offer its IRA investors with the opportunity to make all allowable types of IRA investments. For example, even though real estate is an IRS approved investment, an IRA custodian is not required or obligated to offer that investment option. Accordingly, most financial institutions offering IRA accounts will restrict the IRA investment option to financial products offered by the financial institution. The reason behind this is quite clear – a financial institution earns fees from the sale of financial products not by allowing its clients to pull money out of the IRA account to buy real estate from a third-party.

2. Custodian Controlled Self-Directed IRA

A custodian controlled self-directed IRA offers an IRA investor more investment options than a financial institution self-directed IRA. With a custodian controlled Self-Directed IRA, a special financial institution or IRA administrator will serve as the custodian of the IRA. Generally, all IRA custodians are FDIC insured. Unlike a typical financial institution, most IRA custodians generate fees simply by opening and maintaining IRA accounts and do not offer any financial investment products or platforms. With a custodian controlled Self-Directed IRA, the IRA funds are generally held with the IRA custodian and the IRA custodian, at the IRA holder’s direction, will then invest those IRA funds accordingly.

Until a 1996 court case, the custodian controlled Self-Directed IRA was the only way one was able to use IRA funds to make a non-traditional investment, such as real estate. In essence with a custodian controlled Self-Directed IRA, every step an IRA holder wanted to make had to be carried out through a custodian, which would involve high annual fees, transaction fees, and time delays. In other words, the IRA holder could not take direct control. Every time the IRA holder wanted to pay an IRA transaction expense, for example mowing the grass or pay the bills on a real estate IRA investment, the IRA holder had to pay a custodian to do it.

3. “Checkbook Control” Self-Directed IRA LLC

In the 1996 case of Swanson vs. Commissioner, 106 T.C. 76 (1996), the tax court gave its blessing to a new type of self-directed IRA structure — the Self-Directed IRA LLC also known as the checkbook IRA— that is much simpler than investing through a regular custodial controlled self-directed IRA account

With a “checkbook control” Self Directed IRA, the IRA holder (you) will have total control over your IRA funds and you will no longer have to get each investment approved by the custodian of your account like in a custodian controlled Self-Directed IRA. Instead, all decisions are truly yours. 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 Self Directed IRA LLC bank account to make the investment.

Under the checkbook IRA format, the IRA is set up as a self-directed account that's capitalized by funds rolled over from your current retirement account. Then, a limited liability company (“LLC”) is created in which your new IRA purchases all the membership units/interests. Now, your money is held in an LLC and you are ready to invest at your discretion. A “checkbook control” Self Directed IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.

With a Self Directed IRA, 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 Self Directed IRA LLC bank account to make the investment. The Self Directed IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.

Advantages of Using a “Checkbook Control” Self-Directed IRA LLC vs. a Custodian Controlled Self-Directed IRA

"Checkbook Control": With a Self-Directed IRA LLC, you have even more advantages than using a custodian controlled IRA, including what's called “Checkbook Control.” As manager of the Self-Directed IRA LLC you will have the ability to make IRA investments without seeking the consent of a custodian. Instead, all decisions are truly yours.

Access: With a Self-Directed IRA LLC, you will have direct access to your IRA funds allowing you to make an investment quickly and efficiently. There is no need to obtain approvals from your custodian or deal with time delays in awaiting approval from your custodian or pay any review fees. Your IRA funds will be held at a local bank instead of at a custodian you have never worked with before.

Speed: 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 Self-Directed IRA LLC bank account to make the investment. The Self-Directed IRA LLC allows you to eliminate the delays associated with a custodian controlled Self-Directed IRA account, enabling you to act quickly when the right investment opportunity presents itself.

Lower fees: Another advantage to a Self-Directed IRA LLC account is that you will save a lot of money on custodian fees associated with a custodian controlled IRA. With the “checkbook control” Self-Directed IRA LLC structure, you will not be required to seek custodian investments when making IRA investments allowing you to eliminate custodian transaction fees and account valuation fees associated with a custodian controlled Self-Directed IRA.

Limited liability protection: By using a Self-Directed IRA LLC with “Checkbook Control”, your IRA will benefit from the limited liability protection afforded by using an LLC. By using an LLC, all your IRA assets held outside the LLC will be shielded from attack. This is especially important in the case of IRA real estate investments where many state statutes impose an extended statute of limitation for claims arising from defects in the design or construction of improvements to real estate.

Asset & Creditor Protection: By using a Self-Directed IRA LLC with “checkbook control” the IRA holder’s IRA will be protected for up to $1 million in the case of personal bankruptcy. In addition, most states will shield a Self-Directed IRA from creditors' attack against the IRA holder outside of bankruptcy. Therefore, by using a Self-Directed IRA LLC, the IRA will be generally protected against creditor attack against the IRA holder.

Privacy Protection: With a Self-Directed IRA LLC, the investment will be made in the name of the LLC, whereas, with a custodian controlled Self-Directed IRA the name of the IRA owner will be in the name of the investment allowing the public to easily locate the asset’s owner. For example, if an IRA LLC is established a state such as Nevada or Delaware which offers strong privacy protection, identifying the owner of the LLC would be extremely difficult.

To learn more about the advantages of using a “checkbook control” Self-Directed IRA LLC, please contact a retirement tax specialist at 800-472-0646.


You may also find the following links helpful

IRS Rules and Guidelines

Self Directed IRA LLC - IRS Approved

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