Custodian IRA vs Checkbook IRA

Much Better Use of Your Self Directed IRA

So while custodians that allow investments into “non-traditional” assets are vastly superior to “conventional” custodians, a Checkbook IRA (also known as Self Directed IRA LLC or Real Estate IRA) is a more efficient and effective way to utilize a Self-Directed IRA.

Investors ask if Checkbook IRA is necessary for investing in real estate with a Self-Directed IRA.  Technically, you can invest into real estate, and other non-traditional assets, directly from custodial account. However, there are a number of compelling reasons why checkbook control is highly desirable.

The following are some of the main advantages:

The Flexibility

When executing an investment out of a custodial account, the account owner must fill out a request and submit a substantial amount of paperwork for approval. The account will likely be charged for having the paperwork reviewed and then charged for transferring funds to the appropriate receiving authority. Many account holders experience frustrations when delays are encountered related to investments or transactions that are time sensitive.  In fact, it is impossible to participate in any transaction involving immediate transfer of funds. Auctions and foreclosure are good examples.  The IRA LLC offers the benefit of providing the account owner much more flexibility and control over investment decisions and the ability to act on opportunities immediately.

Also, when there are multiple accounts involved in an investment, an IRA LLC is clearly the superior alternative. The LLC acts as a single entity for the purpose of investment direction and execution, and the bookkeeping simply needs to allocate expenses and income proportionally amongst the members based on their ownership share. Conversely, purchasing a property directly through a custodian with multiple IRA accounts can truly be a paperwork nightmare.

The Costs

Law requires, that every qualified retirement plan must have a custodian or trustee approved by the IRS in accordance with the requirements of IRC section 408. Custodians are banks and other institutions approved by the IRS to hold retirement funds. And, like all other banking type institutions, they are compensated through an asset and transaction fee structure. For a $200,000 account, these fees can range anywhere from $800 to $2,000 per year, depending upon the custodian chosen and the number of transactions executed.

Although to cost to establish a custodial Self Directed IRA is less initially, a one-time set up fee for an IRA LLC will save money in the long term. By transferring assets held by the custodian into the LLC, ongoing or recurring transactions, investments, or asset-based fees are eliminated, the only cost if a nominal flat annual custodial fee plus LLC fee (varies by the state). This savings is magnified with multiple investments. Additionally, establishing the custodial accounts can be tedious and time consuming. Checkbook IRA Facilitator would handle all these details as part of setting up your Self Directed IRA LLC.

Limited Liability

A Limited Liability Company (LLC) is a hybrid legal business entity that combines aspects of both a corporation and a partnership. It consists of members who have membership interests and may be individuals, corporations, other LLCs or, in the case of retirement plans, the IRA account is the only single member.

The LLC has a legal existence separate from its members. Like a corporation, it provides members with limited liability for the actions and debts of the company. And, it allows members to actively participate in management and have control. Should the LLC be sued, any liability is limited to the assets held within the company. The IRA account holder, and any other assets he may be holding outside the LLC, are completely protected.