With a checkbook IRA, you don't have to wait for your custodian to cut checks on your behalf. You get full access to your funds and eliminate delays that can cause you to miss out on high-value investments. So, how do you set up a checkbook IRA?
You can set up a Checkbook IRA by forming a self-directed IRA and filing for a specific type of Limited Liability Company (LLC). After that, you open a bank account for the LLC and fund it to gain checkbook control. From there, you can invest in assets of your choice without involving your custodian.
This article is a step-by-step guide to setting up a checkbook IRA. It covers the six steps you must follow to gain checkbook control of your IRA account.
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1. Form a Self-Directed IRA
Forming a self-directed IRA is a straightforward process. First, you need to choose a custodian to run administrative functions on your account. With over 50 companies licensed by the IRS to offer custodian services, you'll need extensive research to find a custodian that meets your investment needs.
While choosing a custodian, you should consider the following:
- Specialization. There are two types of custodians. Those specializing in traditional assets and those dealing with alternative investments. Though others specialize in both, you should select one specializing in alternative assets only.
- Your investment strategy. The number of transactions you wish to carry out over time should determine your chosen custodian. Some custodians are ideal for a one-time investment, while others are ideal if you want to carry out multiple transactions weekly.
- Experience. Custodians who have been operating for decades and are approved by the IRS signal stability and competence and are the ones you should consider for your investments.
- Fees. A custodian can charge an asset fee or transaction fee. Both charges significantly influence your returns on investment. A lower cost is ideal for building your wealth. You should also consider miscellaneous expenses such as transfer and statement fees.
After choosing a custodian, you'll open your self-directed IRA account. You'll need the following details:
- Personal information.
- A government ID or passport to prove your identity.
- Credit card information to pay the opening fees.
2. Fund Your Self-Directed IRA
The next thing you do after forming your self-directed IRA is to move the fund you'll use to make investment transactions. There are three ways of funding your IRA:
- Rollover. A rollover occurs when you move funds from a qualified account, such as a defined benefit, 403(b), 401(k), to a self-directed IRA. Only one rollover is permitted per 12 month period, so consult your tax attorney, or the MyDirect IRA team, to evaluate your personal situation.
- Transfer. A transfer happens when you move money from one custodian to another under the same type of retirement plan. For example, moving your assets from your Roth IRA to your self-directed Roth IRA. Transfers from one IRA provider to another are always tax-free and penalty free.
- Contributions. This refers to out-of-pocket contributions into your self-directed IRA account.
3. Form a Limited Liability Company (LLC)
A limited liability company (LLC) is a corporation and partnership hybrid. Like a corporation, an LLC has limited liability, meaning the owner is not liable for the company's debts. Like a partnership, it has pass-through taxation where the tax burden passes to the owner.
To form your LLC, you'll follow the following steps:
Choose a Name for Your LLC
The laws for naming an LLC differ from state to state, and you should review them before branding your LLC. However, some rules hold in all states. First, your company's name should have the designation LLC or Limited Liability Company.
Second, it should not infringe existing trademarks. You should use Trademark Electronic Search System (TESS) to search for registered trademarks and those pending approval to ensure your name is unique.
Lastly, your company's name should not be your name.
Appoint a Registered Agent
Every state requires every LLC to have a registered agent. The registered agent in most LLC filings is the owner of the entity. You can also designate a company registered to offer registered agent services. The responsibility of a registered agent is to handle legal or official documents on behalf of the LLC, such as government correspondence, compliance documents, and process notices.
File the Article of Association
While forming an LLC, you must file an article of association with the Secretary of State or any other designated office. It acts as the LLC's manual by defining its purpose, goals, and strategies for achieving them. You provide details such as:
- Name and address of the LLC
- Purpose of the LLC
- Management criteria, that is, who will oversee the daily activities of the LLC
- Duration of the LLC
- Liquidation procedure
Once you fill out the document, you file it at a predetermined fee to receive a certificate showing the LLC is legally registered.
4. Create an LLC Operating Agreement
The operating agreement is perhaps the most important part of the Checkbook IRA formation process. It spells out the members' and manager’s roles, legal and financial rights, and the path the LLC should follow to realize its goals.
It also establishes the boundary between owners and the LLC. After drafting the agreement, each member and manager is required to read it and sign and keep it for future reference. Without a compliant LLC operating agreement, the self directed IRA custodian cannot release your funds to be sent to the LLC checking account, so unfortunately, you won’t be able to print off a legal zoom operating agreement and assume that will do the trick.
The operating agreement of the Checkbook IRA includes language relating to IRA and self directed IRA rules you must follow to remain in compliance with the IRS requirements. It is not recommended you attempt to write your own operating agreement, due to the high likelihood that it will not be compliant with IRS rules, and a) could jeopardize the tax-deferred status of your IRA, and b) will prevent the final step of funding your LLC checking account from even occurring. Your custodian is charged with reviewing all pertinent documents before releasing your funds to your new LLC checking account. If they deem your operating agreement to be ‘non-compliant’ the next challenge is they are by their nature ‘disinterested 3rd parties’ meaning; they cant tell you how to change the operating agreement to make it compliant. That would be deemed ‘tax advice’, something custodians are barred from doing.
Thus, working with a company like MyDirect IRA, who specializes in this process, from the filing, to setting up the Self Directed IRA, and writing the operating agreement for you, eliminates any compliance headaches you’re bound to encounter if you attempt to ‘go it alone.’
5. Apply for Employer Identification Number (EIN)
The IRS requires all small, medium, and large enterprises to have an EIN for tax administration purposes. Though a self-directed IRA is tax-exempt, the IRS requires LLC’s to declare incomes, withdrawals, and transfers. An EIN acts as a Social Security Number and helps separate personal and business income.
It is also a requirement while opening the LLC's bank account. You can obtain an EIN online, by fax, or by mail application. The fastest way is online because you get your EIN automatically after providing all information required in Form SS-4. Also, you can use your custodian's EIN.
The retrieval of the EIN, like the operating agreement, must be done in a specific way in order to be done compliantly. We are experts in the process, and will ensure your EIN is retrieved compliantly so you don’t have to worry about the IRS.
6. Create a Bank Account for Your LLC
To set up a bank account, you'll need an article of organization to identify the business, its officers , and an EIN for tax purposes. Since all banks are not equal, you'll have to evaluate the best by considering the initial deposit required, overdraft protection, and opening fees.
After settling on a bank of your choice, you'll open an account and fund it. You can do this by requesting your custodian to transfer funds or assets from your self-directed IRA to your IRA LLC. Because the IRA–a tax-deferred or tax-free account–owns the LLC, all your investment gains and proceeds remain tax-deferred or tax-free (pre-tax or post-tax)
Once you have funds in your LLC's bank account, you gain checkbook control, and you can start to transact on assets of your choice without relying on your custodian's consent.
Final Thoughts
A checkbook IRA account is best if you wish to have direct access and control over your funds, as opposed to having a custodian you must request to make transactions on your behalf. It speeds up transactions and lowers administrative costs by having a passive custodian. To have checkbook control, all you need to do is contact the team at MyDirect IRA, and we’ll take care of everything described above on your behalf. Let us worry about the compliance piece, whale you worry about sourcing the best investments you can find.