The Self Directed with Checkbook Control (or Checkbook IRA)

For most investors, the custodial Self Directed IRA is the optimal choice. It offers an economic setup, streamlined operations, and Madison takes care of all the paperwork. However, there are certain investing situations where a different kind of Self Directed IRA may be more beneficial. For investment assets that are transaction heavy or require real time funding, a Self Directed IRA with checkbook control is the better option. Checkbook control allows the account holder to perform transactions without going through a custodian. This provides time sensitive investing, as well as the elimination of transaction fees. The two platforms that allow for checkbook control are the IRA LLC and the IRA Trust. 

The Self Directed IRA LLC 

An IRA LLC provides for the diversification of a standard Self Directed IRA but with the benefit of real time access to IRA funds. The tool that makes it possible is a designated IRA LLC checking account. Here’s how the process works. 

  1. Open a Self Directed IRA Account – First, investors establish a Self Directed IRA with a Self Directed  IRA custodian such as Madison Trust Company. This is a quick process and should only take a few minutes. 
  1. Establish an LLC For Your IRA – An ERISA attorney or IRA LLC facilitator generally prepares the LLC paperwork. They will file Articles of Organization with the Secretary of State’s office and prepare a specialized Operating Agreement. The Operating Agreement includes provisions related to retirement plan restrictions as outlined in IRC sections 408 and 4975. The LLC member is titled as “Madison Trust Company custodian FBO [Your Name] [Madison account #]”. The non-compensated Manager of the IRA LLC is generally the IRA accountholder. 
  1. Open an IRA LLC Checking Account – Take your IRA LLC paperwork to the bank of your choice and open a business checking account. 
  1. Fund The IRA LLC – First, fund the Self Directed IRA via transfer, rollover, or contribution. Then, the Self Directed IRA account holder instructs the new IRA custodian, Madison Trust, to send funds to the IRA LLC checking account.
  1. Invest With The IRA LLC – The account holder, acting in the capacity of non-compensated manager of the IRA LLC, uses the IRA LLC checkbook to make all transactions. They can purchase investments in real time, pay bills, and then deposit income back into the checking account. 

Understanding The IRA LLC Structure  

A source of confusion for some IRA LLC managers is understanding which transactions require the involvement of an IRA custodian and which transactions are handled directly within the IRA LLC. A rule of thumb is that IRS-reportable transactions must flow through Madison Trust and transactions that are investment related can be done within the LLC checking account. Refer to the chart below for examples of how this rule plays out. 

Transaction Custodian Involvement IRA LLC 
Transferring funds from an existing IRA  
Rolling over funds from a 401k  
Purchasing an asset (such as real estate, private placement, metals, etc.)  
Paying investment expenses  
Depositing investment income  

Interested to Learn More about the IRA Trust? Reach out to us, and one of our IRA Specialists will answer all of your questions.

IRA LLC Annual Valuation 

IRA custodians must file form 5498 annually for every IRA they hold. One of the purposes of the form is to provide the IRS with an updated value of each IRA. Madison Trust Company will reach out to accountholders in January of each year to request the fair market value of their IRA. For IRA LLCs, accountholders are generally not required to provide a breakdown of the type of investments held within their IRA LLC. Rather, a valuation of the combined cash and assets held in the IRA LLC is sufficient. For example, if the IRA LLC holds $10,000 cash in a checking account, owns a $50,000 piece of real estate, and is the holder of a Note valued at $25,000, then the fair market value of the IRA LLC is reported as $85,000. 

The Self Directed IRA Trust 

A Self Directed IRA Trust is another option for a checkbook control retirement account. A Trust is an entity that can hold funds and permit active management within the confines of the Trust. Like an IRA LLC, it can be set up with a checking account. However, the IRA Trust provides a number of additional benefits that are not offered by the IRA LLC. 

Benefits Of The IRA Trust 

  • Fast account setup – An IRA Trust can be established in as little as four business days. This is great for assets that possess a short time window for acquisition.  
  • Plan Economy – An IRA Trust has a lower setup fee than an IRA LLC. It also doesn’t have to pay any of the state-specific annual LLC fees. 
  • Less Reporting – Although an IRA Trust has to fill out the standard IRS forms associated with retirement accounts, it does not have any state reporting requirements. 
  • Privacy – In a Self Directed IRA LLC, the Articles of Organization are on the public record. With an IRA Trust, there is no state filing and no public record of the account holder. 

Self Directed IRA Trust v. IRA LLC 

In most cases when an investor would like to acquire checkbook control, the Self Directed IRA Trust will be the faster and more economical choice. However, there are a few situations where the IRA Trust is not indicated. They include: 

  • Real estate which needs a non-recourse loan – The loan process can be easier with an IRA LLC. 
  • State specific regulations – There are a few states who do not encourage a Trust owning property, and this can make the acquisition of property insurance difficult. 
  • Multi-member accounts – If you want to set up your retirement account so that it can provide multi-member investing, the IRA LLC is the better choice. An IRA Trust cannot be a multi-member entity. 
  • Liability protection – An IRA LLC offers an automatic protection for certain kinds of legal liability which an IRA Trust does not. 

Moving Forward With an IRA LLC or IRA Trust 

If you already have a specific asset in mind, then your next step should be to get educated. Speak with a Madison Specialist and find out if the IRA LLC or the IRA Trust will better serve your investing needs. Making the right decision now can save your account a tremendous amount in the long run. 

Ready to see if an IRA Trust or LLC is the right fit for your investment?

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