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What is a Checkbook IRA LLC?
A Checkbook IRA LLC is an LLC wholly owned by a self-directed IRA, either traditional or Roth. The Custodian transfers funds from the self-directed IRA on a request made by you, the IRA holder. You are the manager of the LLC and, as such, have checkbook control of the LLC.
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Why would I want a Checkbook IRA LLC?
A Checkbook IRA LLC allows you to fund an investment simply by writing a check. As a result, you can take advantage of investment opportunities as soon as you have done your due diligence without the risk of being shut out because you cannot get the funds transferred fast enough. In addition, since the transactions are being done by you through your Checkbook IRA LLC, your Custodian costs should be lower. No more per transaction fees on your statements.
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As the Manager of the Checkbook IRA LLC, do I have to follow the same rules as the Custodian?
Yes, you are responsible for understanding the rules and abiding by them so you do not compromise your IRA. That means, in addition to doing your due diligence regarding any investment, you are responsible for understanding what a prohibited transaction is and what disqualified parties are.
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What kind of LLC does Your Entity Solution set up as a Checkbook IRA LLC?
We form a Nevada Series LLC with 3 cells. Nevada has very strong statutes to protect LLCs – it is a charging order rules only state - and we do not need to register all the series at the same time as the LLC is formed. This structure facilitates adding in additional funds later on without compromising your IRA, and allows us to easily add more series if your Checkbook IRA LLC is particularly active. Our operating agreement is specifically created for an IRA LLC; and, if needed, we can facilitate using a Manager who stays in place and delegates checkbook control to you or a Manager who resigns and puts you in control after the LLC is funded.
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If I am a California resident, do I have to register my Nevada Series LLC in California and pay the Franchise Tax Board fee on each series?
If you are actively involved in the management of the LLC, you need to register the LLC in California. Each series will be treated like a separate LLC by the Franchise Tax Board and taxed $800 per year. However, issuing checks to pay for investments and receiving interest payments and dividends back is not considered active management. Managing rental properties or doing flips inside the LLC is active management. If you are concerned about having your name appear on public record as the Manager of the LLC you can hire an out of state manager who gives you checkbook control of the bank account. Our Attorney performs this function for a modest fee. Let us know if you are interested.
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If I purchase a rental property in another state with my IRA money, should I place that property into a different series in the Checkbook IRA LLC?
You can place the property into one of the series in the LLC and register that series (if allowed by the state) or the entire LLC in the state where the property is located. A better solution would be to form an LLC in the state where the property is located and place the property into this LLC. The owner of the LLC would be the Checkbook IRA LLC.
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Is the NV Series LLC recognized in other states?
The Nevada Series LLC is a valid entity in every state and will be recognized in every state as a limited liability company.
The issue you need to consider is that most states will not respect the boundaries between the individual series inside the LLC; consequently, the courts will look at the assets inside the LLC as a group. Since this is the case, it is wise to keep only completely passive investments in the LLC where there is no danger of their provoking a lawsuit. These assets include cash, promissory notes and investments in businesses that are held in corporations or LLCs.
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Since assets like rental real estate should not be placed in the empty cells of the LLC, why are you using a Nevada Series LLC?
The sole reason for creating a series LLC is to permit funding of additional contributions without challenging the integrity of the IRA. Our approach is very conservative. Your initial funding goes into Series A of the LLC. When you are ready to add more money to the Checkbook IRA LLC, you send Series A back to your Custodian. Your Custodian will add your contribution to the repatriated assets and fund Series B of the LLC. Since we set up the LLC with 3 cells it is tempting to use one or two of the empty cells to hold assets, like rental property; however, consider what we said earlier before doing that.
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Can IRAs partner in the same Checkbook LLC?
Yes, they can. You can have a multi-member LLC owned by your traditional IRA and your Roth IRA; or your IRA and your spouse’s IRA; or your IRA and a partner’s IRA. Just remember that the assets will then be owned by each IRA in proportion to how the LLC was funded. For example, you and your spouse decide to fund a Checkbook LLC with your respective Roth IRAs. Your IRA has $60,000 in it; your spouse’s IRA has $40,000 in it. When these two IRAs fund the Checkbook LLC with these amounts, your IRA will own 60% of every investment and your spouse’s IRA will own 40%. When the assets are sold and the money is sent back to the Custodian, 60% of the money will go into your IRA account and 40% will go into your spouse’s.
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What is a prohibited transaction?
A prohibited transaction is one that is not allowed under IRS rules. This includes investing in a life insurance contract, investing in collectibles like art, antiques and wine and investing with a disqualified party.
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What is a disqualified party?
A disqualified party is your spouse and anyone directly above or below you, such as your parents and grandparents and children and grandchildren. Adopted children are disqualified but step-children who were not adopted are not disqualified. In addition, you may not do business with yourself or benefit from a transaction with your IRA. Only the IRA is allowed to benefit. Doing business with yourself is called self-dealing and there are severe consequences of such actions.
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Is it okay if I use my Checkbook IRA LLC to purchase a vacation home for use after retirement but spend a day there each year while I check it out?
No, this is self-dealing. You cannot benefit from your IRA investments until you remove them from the IRA.
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Can I write a check from my Checkbook IRA LLC when I want to make a distribution?
No. You should send the funds back to your Custodian and ask the Custodian to write you a check. In doing so, the Custodian will prepare the proper paperwork to send to the IRS.
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Can I use money from my current employer’s 401(k) plan to fund a Checkbook LLC?
While we can do Checkbook LLCs for self-directed 401(k)’s, you need to have access to the money to fund the LLC. Most employers will not do in service distributions from a plan; that is, distributions to you from your plan while you are still working for the company. Generally, you need to leave the company, then roll your 401(k) into a self-directed IRA.
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What happens if I engage in a prohibited transaction?
If you catch it quickly, tell your Custodian and CPA. You may be able to take the amount you spent on the transaction as a distribution and pay any taxes and penalties that may be due. If you do not catch the transaction quickly and act on it, once your Custodian is aware of the transaction he will be forced to dissolve the IRA and distribute the proceeds to you. You will then have to pay the taxes and penalties associated with this dissolution.
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What happens if I partner with a disqualified party?
This is a more difficult situation to manage. Call your Custodian and CPA immediately. If you catch it quickly, you may be able to reverse it and pay a penalty. If you do not catch it or it is too serious to unwind, the Custodian will be obliged to distribute out your entire IRA and you will have to pay the taxes and penalties.
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