A Self-Directed IRA (individual retirement account) is a type of IRA that allows more investment options than a traditional IRA, and provides the IRA holder with more control over his/her retirement funds.
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 has a few restrictions on the type of investments that you can make with your IRA funds. These investments are under the prohibited transaction rules.
1. Financial Institution Offered Self-Directed IRA
The most popular account is the financial institution Self-Directed IRA. It’s so popular because it’s offered by major financial institutions, like Bank of America, Fidelity and Vanguard.
With this type of Self-Directed IRA, you can only make IRA investments the financial institution offers, which is typically restricted to 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.
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 custodian control, 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 custodian control, 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 structure was the only way IRA investors were able to use IRA funds to make a non-traditional investment.
Essentially, with this structure, every step an IRA holder wants to make must be carried out through a custodian. This involves high annual fees, transaction fees, and time delays.
In other words, the IRA holder cannot take direct control. Every time the IRA holder wants to pay an IRA transaction expense, for example mowing the grass or pay the bills on a real estate IRA investment, the IRA holder has 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.
With a “checkbook control” Self-Directed IRA, 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 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.
“Checkbook Control” vs. a Custodian Control
1. Checkbook Control
Again, with a Self-Directed IRA LLC, you have even more advantages than using a custodian controlled IRA, including “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.
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.
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 the IRA LLC account is that you will save a lot of money on custodian fees with a custodian controlled IRA. With the “checkbook control” 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.