Checkbook IRA Problems: Fees, Drawbacks, and Alternatives

Checkbook IRAs have a reputation for being a convenient way to invest in a self-directed IRA, but they also come with some significant drawbacks. One major issue is the potential for excessive fees, which can eat into your investment returns.

Fees associated with checkbook IRAs can be substantial, with some custodians charging upwards of $1,000 per year. This can be a significant burden, especially for smaller accounts.

Investors who opt for a checkbook IRA may also find themselves shouldering the responsibility of managing their account, which can be a time-consuming and complex task. This can be overwhelming for those who are not experienced in investment management.

For another approach, see: Fidelity Rollover Ira Fees

Checkbook IRA problems can be a real headache, but understanding the risks and potential issues can help you avoid them.

The lack of professional management can lead to poor investment choices, resulting in lower returns and potentially even losses.

You may also face penalties for withdrawing funds from a checkbook IRA, which can be a significant setback for your retirement savings.

In addition, checkbook IRAs often lack the required documentation, making it difficult to prove the legitimacy of the account and potentially leading to audits and fines.

You might enjoy: 457 Plan Early Withdrawal

Directly depositing contributions into your LLC account can be a costly mistake.

The IRS mandates that all contributions go through a custodian to maintain tax-advantaged status.

Depositing funds directly into your LLC account bypasses the custodian and jeopardizes your IRA's status.

This error can lead to taxes and penalties, unraveling years of retirement growth.

Always send contributions directly to your custodian, who can then transfer the funds to your LLC's account.

You might enjoy: Are Vanguard Target Retirement Funds Good

Using your LLC for personal cash flow needs is a big no-no, and it's a mistake that can cost you big time. This is because the IRS views any personal use of IRA funds as disqualification-worthy.

Taking even a dollar from your LLC's account for personal use can trigger severe penalties, including disqualification of the entire account. This includes taking distributions in retirement years – they must come from your IRA, not your LLC account.

Suggestion: Can I Use My 401k as Collateral for a Loan

You should consider your LLC entirely separate from your personal finances. Think of it as a business with strict boundaries that cannot be crossed.

To avoid this scenario, set up an emergency fund separate from your retirement funds to cover unexpected personal expenses. This way, you'll have a safety net without compromising your IRA.

The case in question involved a husband and wife who owned self-directed IRAs.

The husband had engaged in a prohibited transaction, resulting in a deemed distribution of his IRA assets and penalties.

No prohibited transactions were asserted against the wife, but rather the question was whether she had violated the requirement that IRA assets must be held in the custody of a bank or a qualified non-bank custodian.

The wife had hired a third-party servicer who advertised a tax loophole allowing individuals to purchase American Eagle coins with their IRAs and store them at home.

The actual custodian was a separate trust company, but it didn't have any role in the management of the LLC, the purchase of the coins, or the administration of the LLC's or IRA's assets.

The custodian did file annual Forms 5498 reporting the value of the IRA assets, but relied solely on the owner's reported valuation for the LLC.

Worth a look: Ally Bank Ira

A Checkbook IRA is a type of Self-Directed IRA that gives investors more control over their investments.

In a Checkbook IRA, a Limited Liability Company (LLC) is set up specifically for the purpose of funding the IRA, and transactions can be made by the LLC owner, who is typically the account holder.

This setup translates to fewer fees, as the custodian only handles account setup, not ongoing transactions.

With a Checkbook IRA, investors can fund investments just by writing a check, and any investment allowed by the IRS is fair game.

You can open an IRA with a company that specializes in self-directed IRAs, such as Rocket Dollar or Broad Financial. Both of these firms offer Custodian Controlled and Checkbook Controlled IRAs.

Rocket Dollar has a Custodian Controlled IRA with a $360 set up fee and $15 per month cost. They also offer a Checkbook IRA with a one-time $600 set up fee and $30 per month cost.

Broad Financial partners with Madison Trust Company to provide Custodian Controlled and Checkbook Controlled IRAs. Their Custodian Controlled IRA has a $100 set up fee and charges $75 per quarter.

Their SDIRA with Checkbook Control has a $1,295 set up fee, which may vary depending on the LLC set up fees in your state. They also charge $75 per quarter, but do not have transaction fees.

Discover more: Solo 401k Fees

A Checkbook IRA gives investors the ability to fund investments just by writing a check. This is a big advantage over traditional IRAs, where custodians handle transactions.

Rocket Dollar offers Self-Directed and Self-Directed Checkbook IRA options, which are unique in the industry. Fewer financial companies offer these types of accounts.

The custodian's role in a Checkbook IRA is limited to setting up the account and creating the Limited Liability Company (LLC). After that, the account holder takes control of transactions.

With a Checkbook IRA, investors can write checks or use an account debit card to make investments for their IRA. This speeds up the investment process and eliminates the need to wait for custodians to make purchases.

For more insights, see: Checkbook Ira Custodians

Checkbook IRA fees can add up quickly, especially if you're not aware of what to expect. The initial setup fee for a Checkbook IRA can range from $360 to $600, depending on the custodian and the type of account you're opening.

Rocket Dollar, a custodian-managed SDIRA provider, charges a one-time fee of $360 for a Self-Directed IRA and $600 for a Self-Directed Checkbook IRA.

Monthly fees are also a consideration, ranging from $15 to $30 per month, depending on the plan you choose. Rocket Dollar's Core plan costs $15 per month, while their Gold plan costs $30 per month.

In addition to these fees, you may also incur costs for prohibited transactions, such as early withdrawal penalties and loss of tax-advantaged status. These consequences can be steep, so it's essential to understand the rules and guidelines for investing in a Checkbook IRA.

Some common prohibited transactions include investing in vacation property for personal use, which can result in hefty fees and penalties.

A unique perspective: Taking Social Security Early and Investing It

Rocket Dollar offers Custodian Controlled IRAs for $15 per month, with a $360 set up fee. Clients who want checkbook control will pay a one-time $600 set up fee and $30 per month.

Broad Financial partners with Madison Trust Company to provide Custodian Controlled and Checkbook Controlled IRAs. Their Custodian Controlled IRA has a $100 set up fee and charges $75 per quarter.

There are 4 free wire transfers per year for Checkbook IRA clients at Rocket Dollar. Broad Financial's SDIRA with Checkbook Control has a one-time set up fee of $1,295, which may vary depending on the LLC set up fees in your state.

Rocket Dollar charges $30 per month for checkbook control, while Broad Financial charges $75 per quarter. Broad Financial's SDIRA with Checkbook Control does not have transaction fees.

Self-directed IRAs can be a powerful tool for investors, but they also come with risks. The IRS has been aware of "checkbook control" arrangements for years and may consider them abusive.

The recent Congressional focus on self-directed IRAs and IRS enforcement could lead to more scrutiny. This case may be just one of many where the IRS takes action against such arrangements.

The court in this case hinted that the IRA owner may have violated the rule against commingling IRA assets by storing fungible coins with other personal assets.

The custodial requirement for IRAs is in place to prevent individuals from having complete control over their IRA assets. This requirement is meant to impose an additional layer of oversight on qualified retirement plans.

For purposes of section 408, a custodial account is treated as a trust. The IRS and courts have interpreted the requirements for bank and non-bank custodians as being substantially equivalent.

Suggestion: Irs Inherited Ira Rules

Checkbook IRAs can be a good fit for clients who want flexibility and control over their investments.

They're ideal for those who want to branch out into less traditional investments and make investments on their own time.

However, Checkbook IRAs may not be suitable for investors who prefer a passive investment strategy or are new to investing.

These accounts often come with additional fees and a larger set-up fee, requiring clients to have cash on hand to get started.

Despite the potential downsides, the benefits of a Self-Directed IRA usually outweigh the costs, especially when considering the diverse investment options available.

With the ability to invest in a wide range of assets, including real estate and livestock, clients can craft diversified portfolios that may offer better returns than traditional investments.