Benefits of a Checkbook IRA

Benefits of a Checkbook IRA

What Are The Benefits of a Checkbook IRA

Last fall, I remembered my father closing in on his retirement age. Anxious and confused, I recall my old man thinking of ways he could legally take advantage of Retirement Account rules so he could save towards retirement. A checkbook IRA was a perfect fit!

A checkbook IRA works as a personalized retirement account for individuals to establish maximum control over their retirement savings. It offers greater control over an individual’s investment decisions, and it allows you to diversify your portfolio and invest at your leisure. 

In the remainder of this article, I’ll be covering what is a checkbook IRA is, how you can set it up, what it can invest in, and its benefits and disadvantages.

What Is a Checkbook IRA?

A checkbook IRA is an investment tool that helps you manage your finances better by giving you a greater amount of control over your retirement account funds. By establishing an LLC, it allows for accountholders to take over and handle the physical transactions, instead of relying on your custodian to conduct transactions on your behalf since all control lies with the participant in the first place. 

Furthermore, you have “Checkbook Control” when working this way. Checkbook Control gives you complete freedom to be in charge of your investment decisions as it enables you to take the helm of all your investing activities. This includes selecting the type of assets you’d like to invest in, as well as contractual agreements and negotiations.

In short, you have complete freedom along with complete control over your own decisions. You can view different IRAs in accordance with the IRS here. 

How Do You Set Up a Checkbook IRA?

Checkbook IRAs have gained immense popularity amongst investors particularly interested in alternative assets investments in a relatively short period of time.

Setting one up to be used for yourself is surprisingly hassle-free and requires minimal work. 

To gain access to a Checkbook IRA, your first step would be to create a self-directed IRA. Next, you’ll need to file and open an LLC. Thirdly, you’ll need to open a checking account in the name of your LLC.

When you set up your  Limited Liability Company, or LLC, your IRA has to be the only owner, or member. You must also be the sole manager of this LLC since the main point of a Checkbook IRA is to have complete control over your investments.

There’s one more step you’ll have to take before you can gain complete Checkbook Control for yourself. Make sure you’ve set up a your LLC’s checking account, after you do this, you can transfer your IRA and 401k funds into this new checking account, where you now have direct access and control over the funds to execute investments.

What Can a Checkbook IRA Invest In?

Checkbook IRAs allow you to invest in almost any asset. In contrast, Regular IRAs often limit the type of investments you can make to relatively common items such as stocks and mutual funds.

With the Checkbook IRA, or IRA LLC, the possibilities are endless, and you have the freedom to choose nearly any asset you want. Some popular non-traditional assets you can invest in with a Checkbook IRA include real estate, crypto-currency, private companies, tax liens, landing, and so much more.

This allows you the privilege to opt for investments that align with your interest and expertise and lowers the risk associated with market volatility by diversifying your portfolio.

What Are the Advantages of a Checkbook IRA?

Time and monetary savings are the most significant benefits of a checkbook IRA. A Checkbook IRA enables you to invest at your own discretion. Direct access and control of your funds enable you to invest in any of the above-named assets with ease, independent of your IRA custodian. In this model, you will physically write the check on initiate the wire required to place your desired investment. No other retirement account structure allows the accountholder this much freedom and access to their retirement account funds.

Another major difference you’ll come across will be in the amount of time you save. Since a Checkbook IRA is personalized, it’ll eliminate the need to go through extensive paperwork you’ll otherwise have to fill out through a custodian to simply make or maintain investments.

This real-time investment possibility provides greater flexibility and allows you to be versatile over the type of assets you want to hold. Another advantage for you here is the amount of freedom a Checkbook IRA provides in terms of its investment opportunities.

As previously discussed, a Checkbook IRA allows you to invest in multiple different assets, which are not possible through traditional means. As you invest in assets across varying categories, you’ll be able to diversify your portfolio. This, in turn, effectively reduces the risk associated with holding on to your assets!

What Are the Disadvantages of a Checkbook IRA?

The most prominent disadvantages of a Checkbook IRA are the high stakes associated with breaking strict rules and regulations. The shift of responsibility from the custodian to an individual owner can require you to have a great deal of knowledge to manage the Checkbook IRA effectively. 

Additionally, you’ll run the risk of losing all your tax benefits and being subjected to penalties if you violate the rules and regulations that come with checkbook IRAs. Sometimes, individuals can unknowingly perform one of many, prohibited transactions.

The fact of the matter is that making sure you engage in only legal transactions is your own responsibility. Being unaware of the veracity of a transaction won’t be good enough of an excuse to avoid action by authorities. This happens to be one of the more prominent risks you’ll have when not working with a custodian.

Another thing to consider that goes hand-in-hand with this previous example is that you’ll have a lot more responsibility on your hands. If a custodian manages your financing activities and deals in bad faith, you always have the fact that you weren’t aware of the situation to fall back upon.

With a Checkbook IRA, that window gets closed. You’ll solely be responsible for all the activities you engage in. As such, any and all repercussions would be faced by you as an individual.

Final Thoughts

A checkbook IRA is an account structure that has gained prominence among investors for the flexibility it confers upon the account owner and the efficiency it creates by eliminating the need for the third-party administrator facilitate your transactions.

However, you must be adequately informed to set up and run a checkbook IRA because is it solely your responsibility to follow the rules outlined by the IRS.

So, if you're closing in on your retirement and thinking of saving for the future, make sure you read up well on a Checkbook IRA to evaluate if having more access and freedomt to invest your retirement account funds makes sense for you.