A Learning Lesson in Checkbook Control IRAs: Part 1

LLC IRA and Checkbook Control IRA : Part 1

I was tired of my financial adviser not giving me enough information and not being available when I wanted help.  I was tired of the stock market; tired of not knowing what was really happening with my retirement funds.  I wanted to take control. After some internet searching, I found a company that promised the control I wanted.  They claimed I could invest quickly and limit fees. I called the company, and they explained all the benefits of a single-member LLC to create Checkbook Controlled IRA (I forgot to ask about, and they didn’t mention, the drawbacks of this type of investment).

The company was very eager to help me set up the account and answer my preliminary questions. I set up the account, moved over retirement money, and received the checkbook in the mail. I purchased my first real estate asset directly from my checkbook and was happy because I had control over my retirement.

What I had purchased was a cabin in at a well-known vacation destination. I was able to rent the cabin out to new vacationers weekly. It was booked solid for months. The more vacationers, the more money for my retirement. Seeing the property cash flow was an investor’s dream.

I woke up from that dream in late September when the pipes burst, and the basement flooded.

I called the checkbook control company with questions about handling the gains and expenses. I was told, “It’s your responsibility to track all monies coming into and being disbursed from the IRA.”   They didn’t tell me that when I opened the checkbook control IRA.  I have never been a business owner and have little experience keeping “the books” straight. But I kept up with them the best I could.

Then the IRS came out with an article stating, “The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contributions limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.”

I called back the company that helped me set up the checkbook control IRA. They explained to me that I needed to call my custodian. I called another number and asked if they could answer my questions about my IRA’s books and if the statement from the IRS pertains to me. They had little education on the subject. The checkbook control structure sounded so easy in the beginning. I soon realized I had gotten in over my head.

The happy feeling of having control was replaced by anxiety.

I started to think about that IRS article: how little I knew about tax laws. Is there a target on my back? If the IRS is looking into LLC IRAs, will I get audited? Is my retirement safe? Where can I go for help?