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Is Checkbook Control Legal?

A Self-Directed IRA LLC is a type of IRA that allows the IRA holder (you) to gain control over your retirement funds so one has the ability to make traditional as well as alternative asset investments, such as real estate and much more. With a traditional custodian controlled Self-Directed IRA, you as the IRA holder must direct the IRA custodian to make the investment you wish to make using your retirement funds, which often triggers high custodian fees and transaction delays.

Whereas, with a Self-Directed IRA LLC with Checkbook Control you as the IRA LLC manager will have the ability to make traditional investments (stocks, mutual funds) as well as non-traditional investments (real estate, precious metals, etc) tax-free and without custodian consent.

The Self-Directed IRA LLC “Checkbook Control” Structure is IRS and tax court approved. The idea of using an entity owned by an IRA to make investments was first reviewed by the Tax Court in Swanson V. Commissioner 106 T.C. 76 (1996). In Swanson, the Tax Court, in holding against the IRS, ruled that the capitalization of a new entity by an IRA for making IRA related investments was a permitted transaction and not prohibited pursuant to Code Section 4975. The Swanson Case was later affirmed by the IRS in Field Service Advice Memorandum (FSA) 200128011.

Prior to the Swanson case, the custodian controlled self-directed IRA was the only way one was able to make alternative asset investments, such as real estate with an IRA. What that meant is that the IRA custodian was heavily involved in the IRA transaction, which often led to high annual custodian fees and transaction delays. Now – with the “checkbook control” Self-Directed IRA LLC, making an IRA investment is as easy as writing a check.

Although, the ability to invest retirement funds in a newly established special purpose entity owned 100% by an IRA and managed by the IRA holder has been deemed legal by the Tax Court and IRS for over 18 years. However, only until recently, did the Tax Court confirm that the use of a newly established limited liability company (“LLC”) wholly owned by an IRA and managed by the IRA holder would not trigger a prohibited transaction. On October 2013, the Tax Court in T.L. Ellis, TC Memo. 2013-245, Dec. 59,674(M) (“TC Memo 2013-245”) held that establishing a special purpose limited liability company (“LLC”) to make an investment did not trigger a prohibited transaction, as a newly established LLC cannot be deemed a disqualified person pursuant to Internal Revenue Code Section 4975.

So, How Does the “Checkbook Control” IRA LLC work?

Unlike a conventional Self-Directed IRA which requires custodian consent and requires high custodian fees, a Self-Directed IRA LLC with Checkbook Control will allow you to buy real estate or make other investments by simply writing a check. With a Self-Directed IRA LLC, a special purpose limited liability company (“LLC”) is established that is owned by the IRA (care of the IRA custodian) and managed by you or any third-party. As manager of the IRA LLC, the IRA holder (you) will have total control over the IRA assets to make the investments you want and understand – not just investments forced upon you by Wall Street.

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

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Posted in Self-Directed IRA