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Checkbook IRAs

25 Apr 2013 4:56 PM | Scott Reed

Some Technical Details: Checkbook IRAs start out like any other IRA with a bank account owned by the IRA custodian and managed in your name. The custodian then creates the LLC and appoints you as an officer or "Investment Manager" who can execute contracts for the LLC. Technically, your IRA makes a single investment by purchasing shares in the LLC. That investment provides the funds that the LLC will invest on your behalf. As the manager of the LLC you open a bank account (at any bank you want) in the name of the LLC and  deposit the money your IRA account invested in the LLC. Now you have effectively set your IRA funds free of the IRA custodian and basically investing you're on your own. (But see the warning below.)
Warning: The main drawback of a checkbook IRA is that along with the freedom it offers comes great responsibility. If you misstep and purchase something through the IRA checking account that is not an IRS approved investment, the penalties are very high. Be sure you are familiar with the regulations on prohibited transactions and disqualified persons.
Final Warning: Some lawyers and IRA custodians warn against checkbook IRAs, claiming the arrangement has not been approved by the IRS and that you may be risking huge penalties, if you go this route. The checkbook IRA custodians and others cite case law (Swanson v. Commissioner, 106 T.C. 76 (1996) plus more recent cases) that they interpret as establishing the legality of the practice and IRS's acceptance of it.
A "checkbook IRA" is a self-directed IRA that allows you (rather then your IRA custodian) to sign your IRA's investment agreements and invest your IRA funds from a checkbook. Checkbook IRAs allow for very rapid transaction times, lower fees and less paperwork.

The arrangement is claimed to be legal because the IRA custodian creates an independent Limited Liability Corporation (LLC) which is owned by the IRA custodian and whose purpose is to manage your investments. The trick is that the IRA custodian appoints you as the manager of this LLC. Since you do not own the LLC and are not an employee of the LLC, the checkbook IRA custodians claim you are allowed to invest in the LLC and you are allowed to manage it. (But see Final Warning Note side bar below.)

The set up costs for this are much higher than for other self-directed IRAs but it greatly simplifies the custodian's administrative work so they charge lower annual fees and usually have no transaction fees.

Here are two self-directed IRA custodians, Guidant Financial and IRA Club, that offer checkbook IRAs. I reviewed Guidant because Michael Shuman mentioned them in his book, Local Dollars, Local Sense, and I reviewed IRA Club because it has relatively low start up fees.

Guidant Financial

Guidant appears to have eliminated most of the fees other than a $105 annual fee (no matter how much you have in your account) and the annual filing fees for an LLC in your state. They charge a set up fee of $2500-$3800 and then just the flat-rate annual fee. No transaction fees to buy and sell assets or loans. The setup fees depends on your state's LLC set up fees and the consultant handling your account (i.e. you may be able to negotiate a set up fee at the lower end of the range).

I was told by a Guidant rep that the annual filing fee for an LLC in Massachusetts is $500 and that Guidant pays $200 and you pay $300.

I do not recommend Guidant because they do not publish their fees or their forms and documents so I cannot evaluate their product. Their lack of transparency itself is a red flag for me.

IRA Club

IRA Club's basic fee structure is available on their web site. At the time of this writing their normal $1850 set up fee is just $1295 and their annual fee is $220.

If we amortize the set up fee ($1850) over ten years, we'd have an effective annual fee of $405. For a $50,000 account that's .8% a year but for a $10,000 account it's 4% a year,  so this type of IRA only makes sense if you 're investing a goodly sum. Their minimum starting amount is $20,000.

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