When people talk about investing using a “Self-Directed Checkbook IRA”, what do they mean?
At it’s core, an IRA is an IRA, i.e. there is no underlying legal difference between a self-directed checkbook IRA and any other IRA. However, the term “self-directed checkbook IRA” is generally (and often confusingly) used to refer to three very different types of IRA accounts:
- An IRA held by a traditional type of broker or custodian (e.g. Fidelity or TD Ameritrade) that allows the IRA owner to direct investments into any stock, bond, mutual fund, etc. that the custodian or broker offers.
- An IRA held by a unique type of custodian that invests directly into “non-traditional” assets, such as real estate, promissory notes, privately-held companies, etc. In other words, the legal owner of the asset would be “ABC Trust Company FBO John Doe, IRA”.
- An IRA held by a similar unique custodian that first purchases ownership in a Limited Liability Company (often referred to as Checkbook IRA, IRA Owned LLC, or Self-Directed IRA LLC), with the LLC executing the investments. The LLC is either 100% owned by the IRA or fractionally owned by the IRA and other investors (which may or may not be other IRAs). Each investment method has its own pros and cons and investors should consider all options before moving forward.