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What to Know About Checkbook IRAs and Investing in LLCs

At a glance: Here's what you need to know before you proceed with a Checkbook IRA/LLC investment.

Some IRA investment strategies require a large number of disbursements from the IRA and/or the need to disburse funds quickly. To achieve this level of flexibility, some IRA investors choose a strategy called Checkbook Control which creates the ability of the IRA holder to write checks with IRA money. This structure is sometimes referred to as a Checkbook Control IRA, a Checkbook IRA, a Checkbook LLC, a Closely Held LLC, a Single Member LLC, or a Family LLC.  Compared to a direct IRA investment, the LLC approach will likely involve additional set-up time, expenses (ideally offset by fee savings), operational responsibilities, and risk tolerance.   

The set-up of Checkbook Control starts with the fact that the IRS allows an IRA to invest in an entity (in any percentage), as an investment while keeping the tax benefits associated with that account type. This entity can be a “closely held” entity, meaning that the IRA holder or another disqualified person is the manager of the entity.  

The most common iteration of Checkbook Control starts with the IRA holder creating a new LLC. The IRA can’t be a member of an S-Corp or be a General Partner in a partnership. The IRA then buys 100% interest in the LLC, meaning the IRA Custodian (New Direction Trust Company) funds the LLC with the eligible retirement funds in the IRA. Once open and funded, the entity may access the checking account to initiate investment activities.  

Possible Structures 

Your IRA can own a percentage in a Checkbook LLC that invests in real estate, brokerage accounts, private debt, private equity, or any number of investments. By partnering with your LLC, you may be able to infuse additional capital into the investment.   

  • 100% sole ownership 
    • Your IRA can be the 100% sole owner in a checkbook LLC, in which you have named yourself as the managing member.   
    • You cannot use a previously established company that you own.   
    • Ownership must be decided prior to initial funding of the closely held LLC; once the initial investment has been made, no disqualified persons or entities are allowed to partner with the company.   
  • Partnering with yourself and others 
    • If you’re looking for ways to increase the buying power of your closely held LLC, you can partner with yourself and other disqualified persons, as long as the percentage of ownership does not change after the initial investment.   
    • Ownership between disqualified persons must be decided prior to initial funding of the closely held LLC; once the initial investment has been made, the percentages must remain in the same proportion throughout the life of the entity.  
  • Financing available 
    • Does your account lack the funds to buy an asset outright? No problem! A closely held LLC can take out a non-recourse loan to finance the acquisition of a property or boost its purchasing power to purchase more.   
    • The loan must be a non-recourse loan, meaning personal finances of the IRA holder or another disqualified person cannot guarantee the loan. Non-recourse loans are typically made on income producing property and typically require 35-40% down payment.   
    • For a list of non-recourse lenders, click here. NDTCO is always here for assistance however cannot recommend or endorse any specific non-recourse lenders.    

Due Diligence 

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, businesses, or principals involved in your IRA’s transactions.   

New Direction Trust Company, as the custodian, is not responsible for the terms and conditions of the entity documents, i.e. operating agreement, subscription agreement, corporate documents, or for finding and pointing out possible prohibited transactions within it.  It is your responsibility, and that of your legal and/or tax advisors, to ensure the entity documents conform to the existing IRS rules and regulations. Not only is it important that these funds be used solely for the IRA and it’s assets, there can be absolutely no “self-dealing” with regard to the assets purchased or services provided to the asset. As the manager or trustee of the entity, it is also your responsibility to understand the Prohibited Transaction rules as stated in IRC 4975.   

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 is legitimate, meets your risk tolerance parameters, and is right for your investment goals.  

We are responsible for:  

  • Ensuring the entity documents reflect the proper titling of the IRA as the member  
  • Providing accurate record keeping of IRA account activity  
  • Annual IRS reporting and filing for the IRA only 

You are responsible for:  

  • Ensuring your investment does not complete prohibited transactions  
  • Providing annual valuations  
  • Due diligence on your IRA’s investments  
  • Ensure all funds return to your IRA and not to you personally.   
  • Any expenses paid come from your retirement funds and not your personal funds.   
  • General management of your investment, this list may not be an exhausted list  

Disqualified Persons/Entities 

All IRAs have a list of people who are disqualified from having certain interactions with that account. Below is a graphic that delineates which persons are disqualified. Keep in mind that any entity that is owned or controlled by a Disqualified Person is also disqualified.  

  • Neither the IRA holder nor any other Disqualified Person to that IRA may live in or use the property.  
  • Disqualified Persons cannot work on the property, for free or for pay. “Sweat equity” is not allowed. Any remodeling, repair, improvement, and even maintenance must be performed by a non-disqualified person or entity.  
  • Your IRA cannot purchase a property from you or any Disqualified Person, nor can your IRA sell a property to a disqualified person.  
  • Neither you nor a Disqualified Person can guarantee a loan for an IRA property.  
  • Disqualified Persons are not allowed to be paid by the IRA.  
  • All earnings from your LLC must flow directly back to your IRA, before taking personal possession. Receiving dividends, returns of capital, or assets in-kind personally, instead of through the IRA, may be construed as a prohibited transaction and result in the distribution of the IRA entirely, along with taxes and penalties. 

NON-DISQUALIFIED PERSONS INCLUDE: 

  • Brother 
  • Sister 
  • Brother-in-law 
  • Sister-in-law 
  • Niece 
  • Nephew 
  • Aunt 
  • Uncle 
  • Cousin 

DISQUALIFIED PERSONS & ENTITIES INCLUDE: 

  • The account holder (you) 
  • The account holder’s linear ascendants (parents, grandparents, etc.) 
  • The account holder’s linear descendants (children, grandchildren, etc.) and their spouses 
  • Fiduciaries to the account (accountants, financial advisors, attorneys, etc.) 
  • Tax-advantaged savings accounts held by any of the aforementioned individuals 
  • Businesses or entities owned or controlled by any of the aforementioned individuals 
  • Spouse 
  • Children of spouse 

Fees 

ANNUAL ADMINISTRATION FEES 

(Assessed and billed annually per asset) 

Checkbook IRA Assets 

$390 per asset 

PROCESSING FEES 

Purchase, Sale, or Exchange 

$130 

OUTGOING MOVEMENT OF FUNDS 

Due when funds leave your account 

ACH 

$0 

Check 

$20 

Cashier or Official Bank Check 

$35 

Wire 

$35 

International Wire 

$35 

Overnight Mail 

$50 

Returned Item or Stop Payment Request or Void Check 

$50 

Annual Administration fees are charged based upon the custodial services provided and are not dependent upon an investment’s performance. Thus, Administration fees are non-refundable regardless of whether the client is unable to generate profits or returns.