Investing with a Self-Directed Checkbook IRA
When people talk about investing with a “self-directed Checkbook IRA,” what do they mean?
A self-directed checkbook IRA is still an IRA; there is no underlying legal difference between it and any other IRA. However, the term “self-directed checkbook IRA” is often used, confusingly, to refer to three different types of IRA accounts.
IRA held by a traditional custodian
Major brokerages, such as Fidelity or TD Ameritrade, offer this type of IRA. The brokerage is the custodian of the IRA.
With this type, the custodian allows the IRA owner to invest the IRA into a limited number of offered options. Options typically include stocks, bonds, and mutual funds. The IRA owner directs the investments of their IRA, but is limited to the options offered by the custodian. All investments must be made through the custodian, and the investments will incur fees and delays imposed by the custodian.
IRA held by a unique type of custodian that allows investments in “non-traditional” assets
This “passive” type of custodian allows a greater range of investment options. With this type, the IRA owner can invest the IRA into non-traditional assets, such as real estate, promissory notes, privately-held companies, etc.
The IRA owner must work with the passive custodian for each investment. The legal owner of the investment asset is the IRA. Assets are titled in the name of “ABC Trust Company FBO John Doe, IRA.” While the IRA owner has more options for investing, the investments are still subject to fees and delays imposed by the custodian.
IRA that owns a special-purpose LLC
This IRA also involves a passive custodian, similar to the above. But in this structure, the IRA purchases ownership in a LLC, and all investments are conducted through the LLC.
The IRA owner is the manager of the LLC. As manager of the LLC, the IRA owner directs the investments of the LLC. This structure enables the IRA owner to invest quickly in a wide range of investment options. And all investments that occur within the LLC are not subject to fees and delays imposed by the custodian.
From the passive custodian’s standpoint, the IRA is invested in one investment only: the LLC. Although the passive custodian is still part of the structure, the IRA owner directs the investments of the LLC with freedom and without delay.
Understanding the differences
Between the three types of IRA accounts, only the third type gives true checkbook control over retirement funds.
While both the second and third types are self-directed, the second type still requires each investment to go through the passive custodian. As noted above, you are still subject then to the fees and delayed imposed by the custodian.
The third type, the self-directed Checkbook IRA, does not require custodian approval for every investment. Once the LLC is purchased by the IRA, the LLC can be used as the main umbrella for the investments. This structure gives total control and lower fees over the long term.
Choosing between the different types
Each IRA account type has its own pros and cons and may not be right for everyone. Investors should consider all options before moving forward.