Checkbook IRA
Frequently Asked Questions about IRA LLCs
1. I’ve heard the term “checkbook control IRA” or “IRA LLC.” Can you define what that means?
When you utilize an LLC in your IRA, you have checkbook control of your IRA funds. The term “checkbook control” refers to your ability to have a checkbook in your hands that is linked to your retirement funds. When you identify an investment, you write the check—you’re in total control.
2. Is this a legal strategy?
Yes, it’s legal. The internal revenue code doesn't give us a list of assets classes we CAN invest in, it only tells us what NOT to invest in. The only two prohibited assets are life insurance and collectibles. Since an LLC is not a prohibited asset, this is a viable strategy for your self-directed IRA.
3. Why can’t I do this with the IRA I currently have with my broker?
Brokers sell stock market based investments. Most brokers don’t even understand this strategy and will discourage their clients from engaging in it. Remember your broker was trained to sell you stocks, mutual funds, CDs, and bonds.
4. What are the advantages of utilizing an LLC versus just having my self-directed IRA purchase an asset?
There can be many advantages when utilizing an LLC in your self-directed IRA, including:
• Control- You literally have a checkbook that is linked to a checking account, set up in the name of your LLC under its own tax ID number. When you identify an investment that you want to invest in you just write a check for it. There is no filling out paperwork, no getting approval from the administrator, and no waiting on someone else to fund the investment—you can take care of it yourself.
• Cost- Checkbook control can help you avoid transaction fees and check-writing fees that are typically associated with a self-directed IRA. Also, if you own multiple investments in your LLC, your administrator still only charges you for one asset, the LLC.
5. Does utilizing an IRA LLC have the same tax advantages as holding an asset directly in my self-directed IRA?
Using an LLC in your self-directed IRA gives you no more or no less tax advantage. Your IRA will invest in and own the LLC. An IRA is a tax-deferred entity, so there is no taxable event in your IRA when investing directly or through the LLC.
6. Can I roll over my current real estate LLC and its investments to AdvantaIRA?
It depends. If your LLC is currently owned by your IRA, you may roll it over to AdvantaIRA. If the LLC is currently held outside of your IRA, then a new LLC must be formed for your IRA. For a new LLC, you will need to create a very specific operating agreement that meets AdvantaIRA's requirements to structure your retirement account this way.
7. Does AdvanatIRA handle the legal work of incorporating an LLC?
No, AdvantaIRA is the record keeper for the custodian. They do not create LLCs nor do they sell any type of investments. Most custodians or administrators require that you use a third party to create the IRA LLC.
8. Does Advanta IRA handle the accounting of my LLC?
No, the accounting for your LLC is the responsibility of the LLC manager or its advisors.
9. Can I partner with friends and family in my LLC?
Yes, but partnerships with disqualified persons are only allowed at the time your IRA LLC is created. It can be a great way to raise additional capital for the purchases you want to make. Percentage of ownership in an LLC is determined by capital contribution, so if your IRA puts $40,000 into the LLC and husband or wife's IRA puts $60,000 into the LLC, then it is a 60/40 split. Also remember, if you have more than one member you have a partnership, which means you are now required to file a 1065 form every year. It’s best to seek advice from your tax attorney or CPA about filing a 1065 form for your LLC.
10. Can I pay myself a salary to manage my LLC?
No, earning a salary is self-dealing. An IRA owner can’t benefit from the IRA’s investments until they are ready to take a distribution, so benefitting from the IRA LLC would count as a distribution. You can refer to IRC Code 4975, specifically the benefit rule, for more detailed information.
11. Does AdvantaIRA need to review and approve investments I want to make with my LLC?
No, when you get checkbook control of your IRA funds through an LLC there is no need to involve AdvantaIRA in the purchases your LLC makes. You’re in control of it and you’re responsible to know the rules and to keep those rules. Your custodian or administrator does not act as police of your LLC. It’s very important that you educate yourself on the rules if you are considering utilizing an LLC in your self-directed IRA.