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Checkbook IRA/LLC FAQs

Q: Which accounts are eligible?

Any account offered at NDTCO can invest in a Checkbook LLC. You can learn more about each account type here.   

Q: Can NDTCO help me invest?

As the IRA holder, you are responsible for performing due diligence on your IRA’s investments. Neither the IRS nor NDTCO researches or endorses the investments, or investment providers, involved in your IRA’s transactions. A competent professional in the legal, financial advice or accounting fields can also be engaged if you need additional help deciding if the investment being considered within your closely held LLC is legitimate, meets your risk tolerance, and is right for your investment goals.   

Q: Why is Checkbook Control considered a gray area?

The court case that is most often pointed to when discussing the legality of a closely-held entity is Swanson vs. Commissioner 106 T.C. 76 (1996). Mr. Swanson was operating a closely-held LLC where his IRA was the sole shareholder, and he was named manager after creation. Mr. Swanson was suing over legal fees incurred when the IRS tried to claim that his IRA was involved in a prohibited transaction. While the lawsuit was mainly regarding repayment of attorney fees, it did raise questions as to whether this structure is allowable- can the IRA wholly own an entity; can the account holder act as the manager over their retirement funds, and can the asset retain its tax-free or tax-deferred status?

The IRS lost the lawsuit and later released documents affirming the ruling and expanding further on some of the rules about transactions that the entity can participate in. Much is left unknown as to some of the legalities of the structure. Though the structure is considered legal, it can be scrutinized on the dealings and purchases the entity makes. The flexibility of checkbook control will require additional care by the IRA holder in avoiding prohibited transactions, but it is important to remember that the closely-held entity is an asset among your portfolio of self-directed assets. As such, your responsibilities as the plan holder of a Checkbook IRA will be no different than the custodian that typically holds the investments made by the entity. The account holder will have to understand that the rules remain hard and fast, regardless of the structure being used for the investment.  

What is UBIT?

Unrelated Business Income Tax (UBIT) applies to debt financed property in IRAs and also applies to operating income received from companies owned by IRAs and qualified plans. Typically, the debt financed income is taxable under UBIT rules for the percentage of property that is debt-financed.  See here for more information on UDFI, UBTI, and UBIT.   

Are there FMV requirements?

Per IRS regulations, you must submit Fair Market Value (FMV) information for your IRA-owned closely held entity once per year at a minimum. This valuation will need to include the value of and documentation for all your investments, liabilities, and cash balances. 

For the valuation to be processed, supporting documentation is required for each asset held by the LLC. Required supporting documentation (value of all investments, liabilities, and cash balances) will depend on the assets your IRA owned LLC holds.  

Failure to provide an annual valuation may result in the taxable distribution of your asset. Accounts that have shown no activity, including the valuation, will not be held by NDTCO because we cannot meet the IRS requirement to annually update the value of your IRA and file an accurate IRS Form 5498 for your account.   

To complete a Fair Market Valuation Form, please: 

  1. Log into the NDTCO Portal.   
  2. On the Overview page, find the appropriate asset and select Take Action and then Valuate in the right-hand column.    
  3. Provide any requested information and upload your supporting documentation.
  4. Agree to the Terms & Conditions and click Submit. Done!   

For further information on Fair Market Valuations (FMV) and how to submit a FMV, please visit this page –  Fair Market Valuations – New Direction Trust Company (www.ndtco.com) 

What is a prohibited transaction?

A Checkbook IRA affords a greater degree of flexibility but also warrants more responsibility on the part of the investor. When investors have direct access to their retirement funds, there is an increased risk of performing a prohibited transaction. 

The following actions are considered prohibited transactions and could result in the distribution of this asset from your plan. When an IRA buys into an entity, the entity is required to comply with the IRS prohibited transaction rules. Prohibited transactions apply to all disqualified persons to your plan. 

  • Engaging in a transaction between your account and a disqualified person 
  • Yield a commission/fee for the purchase, sale, or exchange of assets 
  • Cover account expenses with personal, non-account funds 
  • Use of your IRA’s assets as collateral for a personal loan 
  • Use of your IRA’s assets to guarantee credit for a loan 
  • Receive dividend or distribution payments directly instead of having them go to the IRA 

If it is done correctly, it is possible to create an entity that has disqualified persons as members. Ownership between disqualified persons must be decided prior to initial funding; once the initial investment has been made, the percentages must remain in the same proportion throughout the life of the entity. Disqualified members must also receive the same deal, dollar for dollar on the entity investment. If a distribution from the entity is needed, all disqualified persons must distribute funds according to their ownership. If a dividend is paid by the company, it should be paid by percentage of ownership to all investors.  

 While we can share IRS rules with you, NDTCO does not give tax, legal or investment advice, refer to your financial or legal representative for further details or a possible solution.  

Who can help me create the LLC/entity?

The following attorneys can help you set up a Checkbook IRA. Please note that NDTCO does not endorse any of the below attorneys. The list is for informational purposes only.  Attorney List – New Direction Trust Company (www.ndtco.com)