I work in the field of Self Directed IRAs & 401(k)s. Based on the phone calls and emails we receive, by far the most discussed topic is checkbook control. Some people want it; others don’t. Some service providers support it; others discourage it.

What is it?

What most people are referring to when they say checkbook control is an investment structure that is formed as follows:

1. A person opens an IRA account at a self directed custodian and transfers other retirement account funds into it.
2. The accountholder has a Special Purpose LLC created and names themselves as LLC manager.
3. The accountholder directs their custodian to invest some or all of the IRA funds into the newly created LLC.
4. The LLC further invests its funds, often into real estate, private companies, or mortgage notes. The LLC is owned by the IRA, but managed by the IRA accountholder. Because the manager is the authorized signor on all LLC accounts, this is known as checkbook control.

The legitimacy of this structure was verified in a tax court decision.

Why would somebody WANT checkbook control?

• Eliminate transaction based custodian fees
• No delay for custodian to process the transaction
• Remove custodian’s prohibition on certain legally allowable investments
• Invest in stock market with margin
• Invest in foreign assets with more ease

Why would somebody NOT want checkbook control?

Here’s where the confusion and disagreement occurs. The argument against checkbook control is based on compliance, mostly with prohibited transactions, which in a nutshell are “self dealing” transactions. Self dealing means the accountholder causing the retirement account to buy, sell, or otherwise enter into a transaction with a disqualified person. This category of people includes the accountholder, most of his relatives, and anyone who provides services to the retirement account. So the argument goes like this:

“Prohibited transactions are costly. Without a custodian overseeing your transactions, you are at higher risk of doing a prohibited transaction and paying large tax penalties as a consequence.”

I always do my best to maintain an objective, balanced viewpoint. In light of the above argument, I formed the opinion that it’s good for some people to have checkbook control and risky for others. Therefore, whether checkbook control is appropriate is dependent on the circumstances of the accountholder. I operated under this thinking for over a year…

Then I learned more about the actual matter at hand.

… and have come to a completely different conclusion. Here are the newly discovered facts: [Read more...]