Menu Close


What is a Self-Directed IRA? Top 7 Benefits!

What is a Self-Directed IRA

Discover What is a Self-Directed IRA LLC

A Self-Directed IRA (individual retirement account) is a type of IRA that allows more investment options than a traditional IRA. A Self-Directed IRA is a type of IRA structure that lets the IRA holder (you) have more control over your retirement funds.

However, 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’s lesser 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 you can make with your IRA funds. These investments are under the prohibited transaction rules.

Traditional IRA vs Self-Directed IRA LLC

Many “traditional IRA” custodians advertise themselves as offering a Self Directed IRA. However, what that really means is that you will need their approval on investment decisions. Additionally, you will 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. The IRA will own the LLC, and you will act as manager.

The Custodian then transfers the IRA Holder’s retirement 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.

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 is the financial institution Self-Directed IRA. It’s so popular because major financial institutions, like Bank of America, Fidelity and Vanguard offer the self-directed IRA solution.

With this type of Self-Directed IRA, the IRA holder is generally able to only make IRA investments the financial institution offers, which typically only  includes financial investments, such as stock, mutual funds, and ETFs.

Even though these types of IRA accounts are called “Self-Directed IRA” accounts, they limit their investment scope. In other words, they don’t allow IRA investors to make any non-traditional investments, such as real estate.

Why do the financial institutions limit the investment options available?

A financial institution that offers IRA accounts has no requirement to offer its IRA investors 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 they provide.  This is because the financial institution earns fees from the sale of financial products. However, it does not make money 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 serves 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 often held with the IRA custodian. 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 IRA investors were able to use IRA funds to make a non-traditional investment.

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. This 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. 

This 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. 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, 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 that go 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.

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

1. Checkbook Control

Again, 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.

2. Access

With a Self-Directed IRA LLC, you will have direct access to your IRA funds. This allows 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.

3. Speed

With a Self-Directed IRA LLC, when you find an investment that you want to make with your IRA funds, write a check or wire the funds straight from your Self-Directed IRA LLC bank account.

4. Lower fees

Another advantage to a Self-Directed IRA LLC account is that you will save a lot of money on custodian fees with a custodian controlled IRA. With the “checkbook control” Self-Directed IRA LLC structure, custodian consent is not necessary.

You no longer have to pay custodian transaction fees or account valuation fees.

5. Limited liability protection

By using a Self-Directed IRA LLC with “Checkbook Control”, your IRA will benefit from the limited liability protection 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.

6. Asset & Creditor Protection

Your Self-Directed IRA LLC 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.

7. Privacy Protection

With a Self-Directed IRA LLC, you will make investments 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. This makes it easy for the public to locate the asset’s owner.

For example, if an IRA LLC is established in a state such as Nevada or Delaware, which offers strong privacy protection, identifying the owner of the LLC would be extremely difficult.

Get in Touch

Do you still have questions regarding what a Self-Directed IRA is and how you can benefit from checkbook control? Contact IRA Financial group at 800-472-0646. Our IRA specialists are on-site, ready to answer all of your questions. Get in touch today.

Share the knowledge
Free Consultation