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Everything You Should Know About Opening a Checkbook IRA Account

What is a Checkbook IRA?

A Checkbook IRA, often referred to as a Self-Directed IRA with checkbook control, is an innovative retirement savings vehicle that enables the account holder to exercise direct control over their funds. It essentially operates like your personal checking account, but it’s backed by the assets in your Individual Retirement Account (IRA).
 
The main benefit of a Checkbook IRA is the increased flexibility and control it offers over your retirement funds. By establishing a Limited Liability Company (LLC) for your IRA, you can write checks directly from your IRA for investment purchases.
 
This eliminates the need for custodian approval for every transaction, thus reducing associated fees and allowing you to react swiftly to investment opportunities.
 
However, despite this direct control, the IRS still requires you to retain a custodian as a buffer between you and the assets in your IRA account. This setup allows you to invest the money held in your IRA in a broader range of assets beyond traditional stocks and bonds, offering greater potential for portfolio diversification.
 
Moreover, a Checkbook IRA allows for a broader range of investment options, including real estate, private lending, precious metals, and more, beyond the traditional stocks, bonds, and mutual funds. 

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. 

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.bogartwealth.com
Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 
Please Remember: If you are a Bogart Wealth client, please contact Bogart Wealth, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently.
Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

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