What is a Checkbook IRA?
Therefore, it’s an excellent tool for diversifying your retirement portfolio if you’re comfortable assuming the responsibility of managing your own investments.
Learning as much as possible about an IRA checkbook helps you decide whether this option is right for you. This guide explains everything you should know about a checkbook IRA and provides information on using this financial tool.
When to Open a Checkbook IRA
A checkbook IRA isn’t beneficial to everyone, as it all depends on how you intend to use the account. This option only makes sense if you use it to your long-term financial advantage. Some reasons to go with an IRA checkbook account include the following:
You Plan to Invest in Real Estate
These accounts can be advantageous if you wish to invest in real estate. The reason is that you can use the funds in your IRA account to pay for insurance, tax, and repair costs without having to go through your custodian. The result is a streamlined process with minimal wait times.
You Wish to Manage Your IRA Investments
An IRA checkbook can benefit those who wish to personally manage their retirement investments. You’ll retain control over your retirement decisions with this option, and you can quickly acquire the assets you want. All you’ll have to do is write a check to purchase new investments.
You Want to Reduce IRA Custodian Fees
You’ll save on custodian fees with a checkbook IRA account because your custodian is no longer responsible for completing a thorough review of your paperwork. You still need a custodian, but they will no longer charge processing fees on each transaction, annual administration fees, or investment holding fees because you’re doing all the work yourself.
You Want to Process Investments More Rapidly
The most significant way a checkbook IRA can benefit you is by reducing the time it takes to process transactions. You can instantly purchase things like promissory notes, tax liens, and private company shares without waiting days or weeks for your custodian to complete a review.
Understanding how an IRA checkbook can assist you as you reach your retirement goals is vital. There are some rules and regulations you’ll need to learn, too, to ensure you don’t misuse the account.
Eight Rules Associated With Your Checkbook IRA Account
You have to use your checkbook IRA properly because the IRS is watching. Improperly allocating funds could land you in hot water and leave you paying significant penalties. Some things you must understand about these accounts include the following:
1. You Can Pay Investment Expenses
Using your checkbook IRA to pay expenses associated with your investments is permitted. This rule means you can write checks to pay for repairs and maintenance of your rental properties without using any personal funds.
2. Depositing Your Investment Gains Is Acceptable
You can deposit any gains the investments in your IRA accumulate directly into this account. A custodian handles this process if you have a traditional IRA, so you’ll have to make sure you complete the job to avoid potential issues.
3. You Have to Use Your LLC’s Name
Your checkbook IRA can’t be in your name. You’ll have to create an LLC and open a bank account in the company’s name to separate yourself from this account. The LLC will also need a tax ID, financial books, a filing system, and official record keeping, which you’ll be responsible for maintaining.
4. You Can’t Use the Account for Personal Reasons
You must avoid using this account for any personal reasons whatsoever. Your IRA checkbook is exclusively for your investments, and you must ensure you don’t spend any of the money in this account on items outside of these parameters.
5. Don’t Use IRA Assets for Personal Reasons
You can’t use the assets your IRA account owns for personal reasons, either. You’ll have to avoid living in a rental property that IRA holds, for example, because it must be purely for investment purposes.
6. Avoid Depositing Personal Funds
Don’t deposit any personal funds into the IRA account. Topping up the account to help with expenses or purchase more assets can be tempting, but doing so could put you beyond your IRA contribution limits and leave you in a challenging situation in the future.
7. Don’t Process Distributions Through the Account
You can’t process IRA distributions from the LLC. You’ll have to send the funds you wish to distribute to the IRA custodian, and they will complete the job. Only an IRA custodian can perform the necessary 1099-R reporting, so they have to handle the distribution.
8. You Can’t Do the Repairs Yourself
An important thing to note is that you can’t pay yourself for repairs completed at your rental properties through your IRA. The reason is that the checkbook IRA owns the property, and you are a disqualified party based on the account’s rules.
Ensuring you understand how an IRA checkbook works can limit the problems you experience. These accounts help you take control of your financial future, though, assuming you use them in the proper manner.
Plan for Your Financial Future
A checkbook IRA is just one of the financial tools available as you plan for retirement. These accounts can also take significant work on your part, especially if you don’t have much experience with investments and IRA rules.
Bogart Wealth can provide advice as you seek investment clarity when planning for retirement. We can walk you through all your investment and retirement options, ensuring you make the right decisions for yourself and your family.
Contact Bogart Wealth to learn more about our financial planning services.
