What’s the Difference Between Self-Directed IRAs and Check Book IRAs
By Peter F. Rizzo
Daily I receive questions from clients regarding the differences between a Self-Directed IRA and a Check Book IRA. I’ve laid out a summary of the two types of IRA setups as well as their respective benefits.
In a Self-Directed IRA; also known as a Custodian model; the Custodian must handle all the IRA’s funds and assets, and all transactions must go through them, since it is the IRA making the investment. The investor fills out transaction forms, and the custodian then approves, executes and funds the transaction. It must happen this way since all IRA’s are trusts and therefore the Trustee, or Custodian must be involved.
Whereas, in a Check Book IRA or Checkbook Control model, all of the same steps are followed but only once, for the initial investment. This is because the only investment the IRA makes directly is the purchase of an LLC. The LLC is setup specifically for the IRA to invest in. Once the LLC is approved and funded, the Check Book IRA-LLC allows for the investor to approve all the investments as the manager without involvement of the IRA Custodian. It is now possible for the client to access the IRA’s funds via a local dedicated business checking account.
The LLC manager, who is often the IRA holder, now approves transactions. Authority is granted from the Custodian via an Operating Agreement. This allows the IRA-LLC’s investments to move much more quickly and efficiently since deals now can be executed immediately.
Of course, choosing a Self-Directed IRA or a Check Book IRA depends on the investing strategy that the client plans on pursuing. To help determine which plan might be best it’s important to consider the cost.
The Custodian Model
Most of the Self-Directed IRA platforms available follow the Custodian model. The major advantage of this model is the initial set-up cost. It is typically a few hundred dollars less
than a corresponding Checkbook Control platform. However, the subsequent transaction and handling fees of the specific custodian can quickly escalate.
For an investor who foresees some kind of involvement with the investment, (and this is true in a majority of cases,) then the more prudent route would be the Checkbook Control model.
The Check Book IRA Model
Checkbook Control allows a self-directed IRA to place and manage investments without any custodial involvement whatsoever. The custodian no longer plays a role in the investment process, and thus no further transaction or handling fees will be charged.
FINALLY: TWO MAJOR ADVANTAGES
The Check Book IRA has two major advantages.
First: an economic advantage. Many of the Custodian’s fees that can whittle away at an IRA’s holdings are eliminated.
Second: is speed and ease of investment. No need to send paperwork to a faraway Custodian for approval and funding.
This can slow down a “fast track” deal, and it can prove especially cumbersome when trying to perform routine maintenance. Imagine trying to buy supplies at a local retailer, and in order to do so the investor has to get a preliminary receipt, fill out a form, receive a check, and only then actually purchase the supplies.
Checkbook Control allows for instantaneous investment and maintenance. For any asset that requires more than an initial purchase, the Checkbook Control model provides the more economical and investor friendly platform.
For more information on the Check Book IRA contact us at firstname.lastname@example.org or call (800) 482 2760