A Learning Lesson in Checkbook Control IRAs: Part 2

LLC IRA and Checkbook Control IRA: Part 2

I went back to the internet and started researching LLCs and Checkbook Control IRAs. After filtering through the companies that offered to help setup an LLC IRA, I finally found a website that had more comprehensive information about the pros and cons of checkbook control. I soon learned I didn’t need an LLC or a checkbook to control my IRA. The good news is there are companies like New Direction IRA that let you open completely self-directed IRAs without the hassle of LLCs or checkbooks. My IRA can own the assets directly. The better news is, when my IRA owns the investment directly, my IRA administrator takes care of the books and IRS reporting for me.

When researching Checkbook Control IRA, it is a good idea to look into the drawbacks as well as the benefits before moving forward.  There are responsibilities for the IRA holder that are important to know about from the outset. You might want to ask yourself, “Do I really want this much control of my retirement funds?” The answer for me was a big NO. I want control of my retirement funds, but I do not want the responsibilities of checkbook control. My advice to someone considering this type of set-up for an IRA is, ask the following questions before proceeding:

Q1: An LLC/Checkbook Control IRA sounds appealing, what are the drawbacks of this type of investment?

There are a couple of drawbacks and some out-right dangers.  For Checkbook Control, you must have an entity created. In most cases, that entity is an LLC.  The LLC is a company for which someone must be responsible. In order to manage the entity, you must know all the rules of both running an entity and all the IRS rules about the IRA itself.   Educating yourself on both sets of rules can take a fair amount of time to grasp.   Although many of them are not hard, if you don’t stay current, you may forget or miss something important. Remember, IRS rules regarding prohibited transactions don’t always make sense.   Applying logic doesn’t always get you to the right answer.  And the consequences for the IRA of breaking IRS rules can be significant taxes and penalties.

Q2: What are my responsibilities as the owner of an LLC and Checkbook Control IRA?

The Checkbook Control IRA-LLC is a company.  The company is authorized by whatever state you worked with originally.  The things you will be responsible for can vary widely.  Following is a list of some items suggested by the state of Colorado.  Of course this is only a partial list, and due to the limited activity in most Checkbook IRA-LLCs, some of these might not apply.  The important thing to remember is – The LLC is a business and needs to be treated as such.

• Establish a corporate bank account.
• What officers are authorized to sign checks?
• Trade name – Are you going to do business under a name other than corporate name? If so, contact the Office of the Secretary of State.
• Business plan, budget, cash flow projections, working capital needs – Can you cover payroll, operating expenses, taxes, etc. for a 6 month period? Books and accounts – Contact your accountant. Do you understand the tax implication of the entity you are using for your business?
• Obtain your federal tax identification number from the IRS.
• Obtain your state tax identification number from the Colorado Department of Revenue.
• Do you have all of the federal, state and local tax information and forms?

• Federal withholding
• Federal unemployment
• State withholding
• State Workmen’s Compensation
• State & Local Sales Tax – Contact City Hall

• Zoning – Is local zoning appropriate for your business use?
• City/County business licenses – Contact City Hall or County Offices.
• Special licenses for certain kinds of business – Contact City Hall.
• Liability
• Fire and Premises
• Business Interruption
• Crime
• Officer and Director liability

Again, this list is partial and specific to Colorado.  Be aware of the requirements of owning a company.

Q3: Fees for this service vary from a couple of hundred dollars to thousands of dollars. What services am I getting for the fee I pay?

The services vary widely based on the vendor you select to set up the LLC, but usually what you are buying is assistance in creating the entity itself.   Most companies charge you up-front to start-up then leave you alone.  For on-going running of the business and maintaining the viability of the entity, you will have to arrange for that yourself.

Q4: What happens to me and my IRA if I don’t follow the rules?

Entering into a prohibited transaction, such as providing goods or services to your IRA- owned LLC or making loans, advances or other transactions with your IRA-owned asset, will result in your IRA being distributed to you as of January 1^st of that year.  Distribution results in you having to pay income tax and/or penalties and interest on the amount distributed.  The penalties and interest can potentially go back multiple years.

Q5: Even if I am following the rules, can I still get in trouble with the IRS?

The rules and laws don’t specifically cover all details of these types of arrangements.  Some activities that the IRA-LLC promoters encourage have not been fully tested by the courts nor formally allowed by the Internal Revenue Code or Department of Labor.  In the future, the courts or federal authorities could declare that these activities are not allowed.   And that could easily put you in the position of having committed a prohibited transaction even though you thought you were following the rules.

How I Resolved my desire to get rid of my Checkbook IRA

Once I understood single-member LLC / Checkbook Control IRAs, I decided it wasn’t for me. I was able to move my account to New Direction IRA. I then distributed my investments back into the IRA (and dissolved the entity following the state rules), which still owns the investments as before, but without the risk.