The Facts About the Checkbook IRA

About twenty years ago, the self-directed IRA was introduced to the masses.  This type of retirement account allowed you to invest your retirement funds in any number of investments, including real estate.  Under Section 408 of the Internal Revenue Code, so long as you don’t directly benefit from it, you can use any or all of your funds in an IRA to purchase real estate.  However, up until 1996, you had to use a custodian to do everything, thus incurring costly fees.

Then in ’96, in the case of Swanson vs. Commissioner, came a new feature of the self-directed IRA: checkbook control. This allowed you to completely take over your IRA and how it was invested without needing a costly custodian.  Under this type of format, a self-directed IRA is funded with money that’s rolled over from another retirement account.  Then, an LLC is created which purchases all the membership units.  Now the LLC holds your money and you can invest freely.

Self-Directed IRAs with checkbook control puts you in controlSo, if you’re not into following the markets and have no clue between a bear and a bull market, you can invest in things that you are familiar with.  Here we’ll focus on real estate, but there’s so much more you can invest in from small businesses and certain precious metals.

As for real estate, you can now buy, sell and manage all sorts of properties, from domestic and foreign to commercial and residential.  The funds are in a normal business account and as the account manager you can write checks and sign contracts with it.  This affords you the ability to quickly act on new properties and not have to go through a custodian, which can cause you to miss out on that great new property that just became available while you wait for them to act on your behalf.

There are restrictions when using a checkbook control self-directed IRA.  Foremost, you (or your family) cannot use the property as a primary residence or vacation home for example.  Further, you cannot earn a salary from work done with a property (such as maintenance).  Also, just like a regular IRA, if you withdraw from the account before you reach age 59 1/2, you will incur a 10% early withdrawal penalty.

Some other things to consider:

  • Rental income is tax-deferred and there is no capital gains tax when you sell the IRA-owned property.
  • Any property you purchase with your IRA is owned by the IRA, not you personally.
  • You can invest in raw land, real estate contracts or trust deeds that back mortgages.  If you do not have enough money to make the full purchase, you can combine your resources with others to get the deal done.
  • When buying a property, all the money must come from the IRA and not from you personally.  Further, all costs (like closing costs, maintenance fees and taxes) must also come from the IRA.
  • All income from IRA properties must go directly into the IRA.
  • You cannot do business with family members including spouses, parents and children.

There are fees to be paid and you must still have a custodian, but since you do not need your custodian to deal with every transaction you need to make, you’ll save a ton of money when doing it yourself.

If you’re looking for more information about self-directed IRAs with checkbook control, contact the tax experts at the IRA Financial Group @ 800.472.0646.  They can walk you through what can and can’t be done with an IRA as well as set one up for you.  All at a fair price.  Stop wasting time with something you don’t understand and start making money with your personal knowledge and nohow!

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