How Does a Checkbook IRA Work?

How Does a Checkbook IRA Work?

The cost of living is set to soar higher in the coming years, and unfortunately, more people than ever are struggling to save for retirement. There are several benefits to investing in a retirement account, such as access to tax-deferred growth and employer-matching contributions. However, even with these benefits, it can be challenging to save enough. While several different strategies can help you build a nest egg, one of the most effective is also one of the simplest: investing with a self-directed individual retirement account (SDIRA), like the checkbook IRA.

A single-owner IRA, also known as a checkbook IRA, gives you more control over your retirement funds and investment decisions without input from a custodian or trustee. You're in charge of your investment decisions, unlike with a standard IRA, where you make contributions to the account, and the custodian invests on your behalf. Checkbook IRAs are set up as LLCs, and you have checkbook control over the account, which means you can access your money and make investments without a custodian.

This post will walk you through everything you need to know about how the Checkbook IRA works, the rules that govern them, your investment options, and the benefits of having a checkbook IRA.

What Is a Checkbook IRA?

A checkbook IRA (also self-directed IRA LLC, IRA LLC) is a type of individual retirement account (IRA) that allows you to make payments in the form of checks from your retirement account whenever you want. It's called a "checkbook" IRA because you can make payments for investments directly from a checking account funded with your IRA / 401k funds. 

These types of IRAs typically allow you to decide where you want to invest your money, and they allow you to invest your retirement funds whenever you want to. You have complete control over your IRA funds, unlike a traditional IRA, where your investments are overseen by the custodian.

As the owner of the account, you have full responsibility for making sure it stays in compliance with IRS rules and regulations.

Checkbook IRA Rules (IRS)

If you're considering opening a checkbook IRA or starting a limited liability company to fund your retirement account, it's important to understand the rules laid out by the Internal Revenue Service (IRS). The rules for a single participant LLC are different from those that apply to a corporation, S corporation, general partnership, or sole proprietorship.

The best way to ensure you comply with the IRS is to work with a qualified tax advisor. However, there are some general guidelines that you should be aware of. For instance, single-member LLCs are treated as disregarded entities for tax purposes. This means that all income and expenses are reported on your personal tax return. In contrast, multi-member LLCs are taxed as partnerships and file a separate return.
On the other hand, checkbook IRAs are subject to different rules depending on the state in which they are established. Therefore, it's important to research and ensure you're following all the IRS regulations when setting up your retirement account. Otherwise, you could face significant penalties.

An IRA can own an LLC (Limited Liability Company), provided that it adheres to the rules and regulations of the Internal Revenue Code. Every IRA LLC is subjected to the same "Prohibited Transactions" with disqualified members, which will be discussed later on. In the meantime, here are a few dos and don'ts to get you started:


  • You must not use the LLC income and assets for your personal benefit or for the benefit of a disqualified person. (A disqualified person includes you, the IRA account owner, family members, spouses, children, and their spouses, and corporations owned by you or your family up to 50% or more).
  • You must not sell or lease property owned by the LLC to yourself, your family, or other companies you may own. You must also not lend the LLC's money to yourself for personal use or to any other disqualified persons.

An LLC is a business entity that protects its owners from personal liability. For this reason, the LLC has become a popular choice for holding and investing retirement funds in self-directed IRAs. With a self-directed IRA, account holders have the ability to invest their retirement funds in alternative assets, such as real estate, private loans, or precious metals. An LLC can have many different purposes, but when it comes to investing your retirement funds in a self-directed IRA, it usually makes sense for the account holder to use an LLC as the legal structure for their Checkbook IRA. 

Still, we strongly advise anyone considering setting up an LLC inside an IRA to consult with a financial advisor about the implications for their particular situation before proceeding.

How To Create a Checkbook IRA/LLC

Checkbook IRAs have been around for a couple of decades, with the initial occurrence going back to the mid-1990s, precisely after the 1996 Swanson v. Commissioner case. Since then, checkbook control IRAs have been a powerful vehicle enabling investors to use their retirement money to invest, particularly in real estate, while enjoying the benefits of a limited liability company. The best part about checkbook IRAs is that they can be used to fund a single real estate investment or multiple investments, providing even more flexibility for investors. 

Setting up a Checkbook IRA/LLC is relatively simple and straightforward, just a short initial application with MyDirect IRA. 

Some basic requirements:

  • State-approved formation documents: Articles of Organization or Certificate of Formation
  • LLC Name
  • A bank checking account at a bank or credit union in the name of the LLC
  • Copy of the IRS Tax Identification Number (TIN)

Structure and Steps

The LLC that is used in the Checkbook IRA model is a specific type of LLC. This entity must be set-up in compliance with all of the IRS rules related to Retirement Accounts. Because this LLC is owned by your IRA, it must be set-up properly in order to ensure you don’t infringe on any of the Prohibited Party or Prohibited transaction rules. When done correctly, the account holder is permitted to open an LLC bank account at a bank of their choosing, and lastly fund that account with the IRA and 401k funds the you wish to invest. The Checkbook IRA LLC is a powerful tool that, when used correctly, can provide benefits and advantages not available with other types of retirement accounts.

Now that you see what we're going for, it's time to set up your checkbook IRA in five easy steps:

  1. Set up your self-directed IRA
  2. Transfer, contribute, or roll over funds into your SDIRA
  3. Create an LLC and appoint yourself the manager
  4. Set up a bank account for your LLC
  5. Start investing

Setting up your checkbook IRA involves a little bit of commitment. If you're unsure where to start, get in touch with the experts at MyDirect IRA

1. Set Up Your Self-Directed IRA

The self-directed IRA is the best bet for directed investing, and it is a retirement account that differs slightly from the standard variety. It allows you to invest in almost any asset rather than just select stocks or mutual funds offered by your employer and large brokerages. Your accountant or financial advisor can help you open one of these accounts and start immediately. 

Remember, you must still select your custodian/trustee to manage your self-directed IRA. A custodian or trustee must oversee the account and keep records of its activities, and report to the IRS on your behalf.

2. Transfer, Contribute, or Roll Over Funds Into Your SDIRA.

Once your account is open, you can contribute, roll over, or transfer funds from your existing retirement account. Before investing in real estate, natural resources, and other opportunities brought about by an IRA LLC, you need to move your money into the self-directed IRA. 

If you have an IRA, you can transfer or roll it over into an SDIRA account. You can transfer or rollover funds from your IRA, Roth IRA, 401(k), or 403(b) retirement accounts. 

3. One of the best ways to maximize the potential of your self-directed IRA is to set up a limited liability company. Create an LLC and Appoint Yourself the Manager (can we make mention here again about compliance concerns, ie work with a professional to make sure its done right, the goal is to make this step sound someone complicated so they call me for help, right?)

After you transfer or rollover funds into your self-directed IRA account, you must set up a limited liability company or LLC that will be owned by your IRA. You can create an LLC at your state's Secretary of State office.

Once you have your LLC, you must appoint yourself the company's manager and file essential documents, including the Articles of Organization (or the Articles of Incorporation for some states). Once your LLC is up and running, you must also obtain a Federal Tax Identification Number (TIN). 

You can obtain a Federal Tax Identification Number from the IRS by applying online, by fax, or by mail. Your IRA LLC must have a Federal Tax Identification Number to operate.

4. Set Up a Bank Account for Your IRA LLC

You can open an account at any financial institution. It's important that you select a bank that is familiar with self-directed IRAs. The bank should be able to provide you with the services you require (i.e., checkbook control). 

You may want to consider a local bank or credit union where you can meet with a financial representative.  

5. Start Investing

Once you have an LLC, a bank account for your LLC, and money set aside in your self-directed IRA, you're ready to start investing. With a self-directed IRA, you're not limited to only investing in specific stocks or asset classes like real estate and private equity. 

You can invest in almost anything your heart desires: real estate, start-up businesses, small businesses, venture capital trusts, gold, timber, oil, and gas. The best way to get started is to research some investment options and find one you like. That's all there is to it. Now you can finally start managing your investments, control your retirement account, and take control of your financial future.

A Checkbook IRA is a great way to manage and control your own investments. The best part is that it is a legitimate way to create your own investment account and have complete control of your investments.

Benefits and Disadvantages of Checkbook IRAs

When it comes to retirement savings, there are so many different options to choose from. It can be overwhelming, especially if you're just starting out and don't have much money to spare. 

What we do know for sure is that checkbook IRAs bear the following benefits and disadvantages for investors:

Benefits of Checkbook IRAs

  • You have complete control over your financial decisions: With a checkbook IRA, it gives the owner direct access to their retirement funds. You can invest in whatever assets you think will generate the best return in the future. You don't have to stick with your brokerage provided options.
  • Convenience: A checkbook IRA is an account that allows you to make payments directly and almost instantaneously. Instead of writing a check and sending it to your custodian, you can make the payment for a property or an asset yourself.
  • Diverse investment options: Open a traditional IRA, and you're limited to specific types of investments. With a checkbook IRA, you can invest in almost anything.

Disadvantages of Checkbook IRAs

  • A large amount of administrative duties: If you choose to use an LLC as the investment vehicle for your checkbook IRA, you'll be responsible for managing the company. You'll have administrative duties, such managing the LLC, keeping track of expenses, etc. Your responsibility also extends to keeping the company assets separate from your personal funds.
  • More risk: With a checkbook IRA, you're managing your own money and are responsible for making all the decisions affecting the LLC's future. There's no shame in asking for professional help when you're unsure what the next financial decision should be.
  • More time: Getting your finances in order and opening an IRA takes time. It takes time to make investment decisions and track your trades. Managing your investments and keeping track of your expenses as the LLC manager also takes time.

Who Is a Checkbook IRA For?

Anyone who wants more control over their investment decisions and is willing to put in the work can benefit from a Checkbook IRA. Checkbook IRAs work best for people who want to manage their own money, have independent abilities to seek investments and are willing to put in the work to manage their investments. Additionally, a Checkbook IRA allows holders to pool their money with other investors, giving them greater buying power and access to a wider range of investment options. Finally, because a Checkbook IRA is a single-member LLC, all of the LLC's assets are protected from the creditors of the account holder. This makes a Checkbook IRA an attractive option for anyone who is looking for more control and flexibility when it comes to managing their retirement savings.


Checkbook IRAs provide the benefit of being able to invest in almost anything, including real estate and private equity. Self-directed IRAs are a great way to start investing because they give you complete control over your retirement savings and diversify your portfolio by allowing you to invest in a wide range of assets. If you open a checkbook IRA, first, you must be prepared to manage your account on your own and keep track of your contributions, expenses, and investments. This can be a daunting task for some people, but the benefits of having complete control over your retirement savings make it worth the effort. Second, you'll need to choose the best custodian for your checkbook IRA. There are many options out there, so it's important to do your research and choose the custodian that's right for you. Finally, remember that you can only contribute a certain amount of money to your checkbook IRA each year. Be sure to consult with your financial advisor to determine how much you can contribute to get the most benefits from your account.