Traditional retirement accounts limit your investment options. Stocks, bonds, and mutual funds might work for some, but what if you want more? A Self-Directed IRA (SDIRA) gives you the flexibility to invest in real estate, private businesses, and other alternative assets. A Checkbook Control LLC takes that freedom even further by allowing you to manage your IRA investments without needing custodian approval for every transaction. This structure provides faster execution, lower fees, and complete control over your retirement funds.
However, with greater control comes responsibility. Mismanaging a Checkbook Control LLC can lead to severe tax penalties. The IRS enforces strict rules regarding self-dealing and prohibited transactions, making it essential to understand how to navigate these regulations before setting up an SDIRA LLC.
What Is a Checkbook Control LLC?
A Checkbook Control LLC is a limited liability company owned by your SDIRA. It allows you to make investment decisions without having to wait for a custodian to approve every move. Instead of requesting transactions through a third party, you can write checks or use a debit card to execute investments instantly.
Setting up a Checkbook Control LLC requires several steps. First, you need to open a Self-Directed IRA with a custodian that allows for this type of structure. Next, an LLC must be formed with the IRA as its sole member. Once the LLC is established, you will open a business bank account in the LLC’s name. Funds are then transferred from the SDIRA custodian to the LLC’s bank account, giving you direct control over your investment decisions. This setup eliminates delays and administrative fees associated with custodial approval, making it a preferred choice for those who want to actively manage their retirement investments.
What Can You Invest In?
A Checkbook Control LLC offers the freedom to invest in various asset classes that traditional IRAs do not allow. Many investors use it for real estate purchases, whether buying rental properties, flipping houses, or investing in raw land. It also enables private lending, where you can issue secured loans and collect interest as a form of passive income. Precious metals such as gold, silver, platinum, and palladium are also permitted investments, but they must be stored by an approved custodian rather than held personally. Additionally, tax liens, deeds, and private businesses can be acquired under an SDIRA LLC, provided all transactions comply with IRS regulations.
While the investment possibilities are extensive, it is crucial to ensure that each transaction benefits the retirement account exclusively. Any violation of these rules could jeopardize the IRA’s tax-advantaged status.
Prohibited Transactions: The Rules You Can’t Break
Despite the flexibility of a Checkbook Control LLC, certain transactions are strictly prohibited. The IRS prohibits any investment that directly benefits the account holder or their immediate family members, including spouses, children, grandchildren, parents, and grandparents. Transactions involving businesses in which the account holder owns at least 50% are also forbidden.
Examples of prohibited transactions include purchasing a rental property through the LLC and then living in it, lending money to yourself or a family member, or personally guaranteeing a loan for an IRA-owned asset. Investments in collectibles such as artwork, antiques, rugs, and gems are also disallowed. Additionally, S-Corporation stock cannot be held in an SDIRA, as it would cause the S-Corp to lose its tax status.
Another common mistake is holding precious metals in the LLC’s name instead of having them stored by a qualified custodian. Any violation of these rules could result in immediate tax consequences, disqualifying the IRA and triggering substantial penalties.
Common Pitfalls to Avoid
Even experienced investors can make mistakes when managing a Checkbook Control LLC. One of the most common errors is failing to keep personal and IRA funds separate. Using the LLC’s bank account to pay for personal expenses—even accidentally—could be considered a prohibited transaction. To maintain compliance, all financial transactions should be meticulously documented and strictly limited to investments that benefit the IRA.
Another frequent misstep is improperly contributing funds to the Checkbook Control LLC. All contributions must first go through the SDIRA custodian before being transferred to the LLC. Depositing funds directly into the LLC’s bank account without following this process can result in tax penalties. Similarly, personally guaranteeing a loan for an investment property purchased through the LLC is not allowed. Since IRA investments must be non-recourse, any loans must be secured solely by the asset itself, without personal liability on the account holder’s part.
Self-dealing is another critical issue to watch for. Any transaction that directly benefits the account holder, their family, or their business could lead to severe tax consequences. For example, an investor cannot purchase a vacation rental through their SDIRA LLC and then stay in the property, even if they pay market rent. Every transaction must be an arm’s-length deal that benefits the IRA alone.
Another potential pitfall is failing to account for Unrelated Business Income Tax (UBIT). Certain types of income generated through an SDIRA LLC, such as earnings from an actively managed business, may be subject to UBIT. Understanding how this tax applies is essential for avoiding unexpected liabilities. Consulting with a tax professional can help investors structure their SDIRA LLC properly to minimize exposure to UBIT.
Why Work with Aspire Legal Solutions?
Setting up and managing a Checkbook Control LLC can be a powerful way to expand your investment opportunities and maximize your retirement savings. However, navigating IRS regulations requires careful planning and legal expertise. At Aspire Legal Solutions, we specialize in structuring SDIRA LLCs to ensure compliance and protect our clients from costly mistakes.
Our team provides comprehensive legal guidance, helping investors avoid prohibited transactions, draft clear operating agreements, and stay compliant with both IRS and state regulations. With over 30 years of combined experience in asset protection, estate planning, and business structuring, we offer customized solutions that secure your financial future.
Contact us today to schedule a consultation and take control of your retirement investments with confidence.
