What is "Checkbook Control"?
A few Words about "Checkbook Control" You should consider Checkbook Control only if you: Checkbook Control of an IRA's Assets is not for everyone and you should carefully evaluate your own readiness to assume this level of control, but the results for many have been life changing and are available in Self Directed Plans that do not offer direct checkbook control, but do all the record keeping for you.
You should consider a Checkbook Control IRA LLC if you want:
Many of my seminar attendees or students ask me for written proof that Checkbook Control in an IRA is permitted by the IRS. At this time the IRS has not put a position in writing. The strategy has been around for a few years. Only Checkbook Control gives a knowledgeable investor the ability to act instantly on an investment opportunity and in a volatile market this can be a critical factor, although some new plans are offering an IRA Debit Card as well as Checkbook privledges. Remember that the use of a Debit Card or Check against Self Directed Retirement Plan assets will be considered a distribution unless properly accounted for by your plan administrator or custodian. Distributions before retirement age are subject to penalties.
About 3% of all IRA’s are self Directed but it is a rapidly growing area because of the scandals and dismal results for average IRA investors on Wall Street. The fact is that people need and want this strategy to take control of their own assets and direct them towards investments they know can make good returns in these difficult times.
Self Direction in an IRA is made available in the provisions of Form 5305-A. There is no definitive Supreme Court Case or IRS Advisory Opinion that specifically says Checkbook Control of your IRA is legal. There is no IRS ruling or Advisory Opinion (AO) that says it is illegal either. Nowhere in IRS publication 590 "Individual Retirement Arrangements" does it say you cannot use "Checkbook Control" in your IRA. If you do a search on the IRS Website at www.irs.gov on "Checkbook Control IRA’s" you will get 0 results.
The IRS tax code contains 45,000 pages and 9 million words and many sections contradict each other. Generations of Lawyers and Accountants have made their fortunes from this fact. Here is the link to the latest IRS "Dirty Dozen" Tax Scams at: http://www.irs.gov/newsroom/article/0,,id=180075,00.html . As you will see, Checkbook Control IRA’s are not on the list.
The basis for Checkbook Control (which is a marketing term only and does not appear anywhere in IRS Publications) in an IRA is the formation inside the IRA of an LLC with the IRA planholder (you) as the manager of the LLC. As the manager of the LLC, you have the ability and the right to conduct the ordinary business of the LLC, which includes writing checks. Many point to the Swanson Case (Swanson vs. The Comissioner, 1996, in the United States Tax Court (Docket No. 21203-92) to support the use of Checkbook Control in an IRA, but the Swanson decision does not specifically discuss the use of or exclude the use of Checkbook Control in an IRA. Swanson did affirm the legality of the IRA owning an LLC.
It is important to note that the structure of an IRA LLC is designed specifically to comply with IRS and Department of Labor (DOL) codes. An IRA LLC for checkbook control should be created by a legal specialist in pensions and not a general practitioner of law. This is also true of an LLC created specifically for holding IRA assets.
The ability to make alternative investments in your IRA comes from Section 408 of the IRS Code, which is available online at www.irs.gov/pub/irs-tege/irc408.pdf . The text plainly says that the only investments you cannot make from your IRA assets are in "Life Insurance Contracts" and "Collectibles" as defined in the same section of the Code.
Because other alternative investments like stocks, bonds, mutual funds, CD's etc. are not specifically excluded (remember, only life insurance and collectibles are specifically excluded), they become permissible. This includes Real Estate, Mortgage Notes, Private Mortgage Pools Tax Liens, Private Placements, investments in Start Up companies and so on because they are not excluded.
An example of this kind of language is on the IRS website on the IRA FAQ page excerpt below.
Similarly the use of Checkbook Control is permitted, because it has not been excluded.
The public concern about the use of checkbook control is that if average investors have checkbook control they will accidentally (or on purpose) do a "Prohibited Transaction" as defined in the Code Section 26 IRC 4975 and "self deal" or deal with a "disqualified person" and there will not be a custodian there to catch it. Given the current economic climate and recent IRS rulings related to funding a business with IRA assets, it is likely that Checkbook Control IRA plans will receive more IRS scrutiny in the future.
Self Directed Custodians and Administrators are Federally Regulated. They hold all documents on your behalf and prepare regular statements on account assets and tax forms if required. You direct your investments through a "Direction of Investment" letter to buy and sell and they charge for many transactions. The main reason to consider transacting through a Custodian or Third Party Administrator (TPA) is the bookkeeping they perform on your behalf. There are many solid companies of both types in the marketplace.
Another concern about Checkbook Control facilitators is that they are not regulated, but they generally work with regulated Custodians. Since facilitators are not fiduciaries and have no access or control of your funds (only you do), this may be a non-issue. You should not rely on the investment advice often given by facilitators unless they are also tax or legal professionals offering a written tax or legal opinion about your situation. You hold all documents and are responsible for tax filings when required. You are solely responsible for all due diligence on investments and for your investment results. Many times facilitators rely on income from investments they promote. Third Party Administrators and Custodians never recommend investments and do not take any fees or commissions from vendors.
In all types of self directed retirement plans, you choose where your money is held and are responsible for your own due diligence.
If you cannot balance a checkbook or keep IRA investment related documents together in a file, do not do a Checkbook Control plan until you have learned this critical skill. Of course if you wish, you can always do a Checkbook Control plan and pay a professional (from funds in your IRA) to keep your books and balance your checkbook.
With any Directed Trustee or Custodian you will sign a Hold Harmless Agreement and an Arbitration Agreement. For the most part, the liability of Custodians or TPA’s relates to Errors and Omissions on the documents they process for you and for timely execution of the trades you direct. Remember Custodians/TPA’s have no Fiduciary Capacity or Liability and do not help with investment decisions because they are custodians or administrators.
Self Directed Plan providers of all types can and often do have relationships with Private Money Lenders and other sources for Real Estate and other alternative investments. They do not promote or recommend these vendors, but often provide educational presentations by these vendors for your information. This provides added value to you as an investor. A Custodian or TPA cannot legally receive compensation from investment product providers and any legitimate provider would not consider this option. Many facilitators do accept commissions from investment vendors and this may affect their objectivity about those investments.
So, the decision to use a Checkbook Control Retirement plan is up to you and should be based on a thorough review of the available documentation and by consulting with your own trusted tax and legal professionals. If you have questions about your situation please email me at lance@selfdirectioncentral.com .
In the near future I will share information about the incredible benefits of the new Self Directed Individual (k) plans for Sole Proprietors, Solo Practitioners and other Professionals and Small Business owners. Many of the problems and issues related to Self Directed IRA's are non-issues for Individual (k) plans and the inclusion in 2006 of a Roth (Tax Free Distribution) component make these plans a must consider proposition for any entrepreneur that is a sole proprietor or practitioner.
Categories: Opinion,Retirement planning,IRA,Financial Planning,Checkbook IRA
Lance-
Thanx for your clarity regarding checkbook control. I am presently researching several potential investments in my SDIRA and have found private placements( under Regulation D) as potentially excellent opportunities. I know that many custodians resist these types of investments. Checkbook control is the best way to obviate that problem. I am looking to find/network private placement investments and was wondering if you know the best resource to do this? I love the fact that they often provide both a secured return AND an equity position.
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Thom,
Since these types of offerings cannot generally be advertised they are marketed between people with a prior business relationship or by word of mouth. Depending on the type, an offering may be limited as to the number and financial status of investors that can be involved. Private Placements of Equities involve considerable risk of loss of principal and should be reviewed carefully by the appropriate legal and tax counsel before your invest IRA funds. I will be writing an entry on the topic in the next month or so.
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