Checkbook Control IRA Horror Stories

New Direction IRA has never recommended an investment nor provided investment advice, and we never will.  What we try to do sometimes is describe what some of our clients are doing – we provide examples and options.  Usually we deliver positive examples, such as the client whose self directed IRA bought a tractor and rented it out hourly, daily, weekly, monthly – enlarging his retirement account after every rental.  We love to share the good examples and will continue to do so.

This week, however, we’re providing some cautionary tales.  Such as the story of the retirement investment vehicle stuck in the mud.

We’ve described how to care for your single-member LLC (AKA the checkbook control IRA).   We’ve described this in detail because there are many many details, many hoops for the retirement investor to jump through when investing in a single-member LLC.  Some of the hoops are extremely flammable.

Our president, Catherine Wynne, shared her point of view on Swanson, a case which many people use to justify single-member LLCs/checkbook control IRAs.

We’ve also described that the IRS may be firing a warning shot over the bow of those who invest retirement funds into their own businesses.  Frequently, these two gray areas are combined, and this situation describes our first horror story.

The Horror Stories

Early one morning, a man called as soon as we enabled the phone system, his voice trembling, “I think I may be in very big trouble”, he said.  He took some money from his LLC and spent it on his own personal company without tracking it, not realizing that this was a taxable, penalizable occurrence.  “It was my LLC,” he said, “I always thought I could do what I wanted with it.  Nobody told me different.”  He was the client of another firm, a firm that specializes in single-member LLCs, and they wouldn’t call him back.  We are still doing our best to help him.

A couple, dazzled by the fact that they had their own company, the single-member LLC, put personal funds into the LLC.  This is an outright prohibited transaction.

Another man sold a real estate asset from within the LLC and used his own Social Security number on all closing documents.  Consequently, he received a 1099 and owed taxes on the proceeds of the sale, which severely cramped his personal finances.  If some folks, myself included, happened to do the same, we would have to declare bankruptcy.

A woman with property in Honduras sold the property, which was held in her ”checkbook control” IRA, and she put the proceeds into her personal bank account without our knowledge.  She used these proceeds to purchase commercial property in her own name. The purchase had to be reported as a prohibited
transaction. We don’t know the end of this story as she’s out of the country. This could end up as a criminal matter.

• Fines.
  
• Penalties.
  
• Forced distribution of assets.
  
• Gargantuan tax bills.
  
• Jail time.

These are a few of our least favorite things.

As stated up top, we do not and will not advise our clients on investments, unless they’re trying to perform a prohibited transaction.  We give as much information as the client will take, and hope for the best.  We want our clients and potential clients to know their options – by no means is a single-member LLC the best or only option for self-directed IRA investment. And by no means is New Direction IRA one of the many firms who will push you into a checkbook control IRA. What we do provide is expertise in the rules, an experienced sounding board for you and your investment ideas.

We now resume our regularly scheduled stories of successful and happy investors.

Photo courtesy of phototram.