The Difference Between a Self-Directed IRA and a Checkbook IRA (where investments are controlled by an LLC) and why it’s important to know the difference.

by Peter Rizzo

Life Settlements in a Retirement Account? Think Again.

I think everyone will agree that we are in some turbulent economic times. This seems to be an ongoing curve that takes us from prosperity to turbulence and back. Whether it be a 4-year cycle or 15, the tides turn both ways.  Even in the midst of turbulence there are opportunities to build your retirement accounts, but you should know which system works best for you and the differences.

The Similarities:

  1. You can invest in alternative investments such as Cryptocurrency, precious metals, tax liens, rental real estate and a myriad of other investments.
  2. They both have the same contribution and distribution rules.
  3. They both have the same RMD rules.
  4. They both require a custodian to handle contribution and distribution reporting. Custodians may include banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) to act as an IRA custodian.
  5. Congress is the primary entity responsible for creating the federal laws that govern IRAs.
  6. They are both governed by the same beneficiary and inheritance laws.
  7. They are subject to the same state and national account protection laws.

The Differences:

  1. The Self-Directed IRA owns the investment, where in the Checkbook Controlled IRA with an LLC, the investment is owned by the LLC that the owner of the IRA or their assignee manages.
  2. With a Self-Directed IRA, investments must go through and be approved by custodian, where in a Checkbook controlled IRA with an LLC the manager of the LLC approves the investments.
  3. With a Self-Directed IRA, when an investment is sold or transferred, the IRA Custodian must sign off on the transfer. In a Checkbook Controlled IRA with an LLC, the manager of the LLC signs off on all transfers.
  4. With a Self-Directed IRA, all investment income and in the case of real estate investments payment of maintenance must flow through the Custodian. In the Checkbook Controlled IRA, with an LLC all investment income and expenditures stay at the LLC level flowing in and out of a business account owned by the LLC and controlled by the manager of the LLC.
  5. If a custodian change is desired the investments of Self-Directed IRA must be retitled to the new Custodian Controlled IRA. With the Checkbook Controlled IRA with an LLC, the Change in custodian only requires a change in operating agreement once the new IRA is established.
  6. With a Self-Directed IRA, the custodian files the yearly 5498 form to the IRS. With a Checkbook Controlled IRA with an LLC, the custodian would still file the yearly 5498, but the IRA owner would submit a report of the valuation (Value of Investments + Cash owned by LLC) of the LLC yearly.

One of the reasons I described the Checkbook IRA with an LLC the way I did was that there are some custodians that advertise a Checkbook IRA but in reality, it’s just a Self-Directed IRA with a 3rd party controlling the bills and income, but still running all income and payments through the custodian.

When looking over this list, many people say, “Why in the world would you not want a Checkbook Controlled IRA with an LLC?” The beauty of the Checkbook IRA with and LLC is that you control the investments locally and you can move the LLC to another Custodian with just a change of operating agreement. This gives you both protection against a custodial collapse or a massive price increase from the custodian. You also can hold titles to your assets rather than just a certificate saying you have an asset or an outside entity controls the asset. With all this freedom though comes the responsibility of record keeping and doing your due diligence when vetting investments. Some people like the invest-and-forget-about-it model of the Self-Directed IRA. There are many times we have told people that would be their best route. Recently, a gentleman wanted to buy a piece of land with his IRA and let it sit for years. The Self-Directed route was the best for him in that situation.

The real bottom line is to look at all your alternatives and find out what is best for you to achieve your future goals. Don’t be sold a plan; educate yourself to make an informed decision.



Contact Us

    Name *

    Email *

    Phone *

    How can we help? *