The vast majority of Americans save for their future through IRAs and employer-sponsored 401(k) retirement accounts—and for good reason. These professionally administered, tax-advantaged accounts make it easy to grow your nest egg through a variety of traditional investments.
But have you ever wondered about investing your retirement funds in something else, like real estate? Then you might want to explore rolling a conventional IRA or old 401(k) over into a self-directed checkbook IRA.
What Is a Checkbook IRA?
Most people open IRAs that are offered and administered by financial institutions. These plans offer a few different investment options, but they are limited to stocks, bonds, mutual funds, and ETFs.
A self-directed IRA provides another solution. Still structured as either a traditional or Roth IRA, it’s self-directed by you, the investor, rather than by a bank. Why would you want to do that? It gives you more control to manage and fund the account the way you want, including with alternative investment options. It also allows you to establish companies owned by your IRA, turning it into what’s referred to as a “checkbook IRA.”
How Do Checkbook IRAs Work?
After establishing a self-directed IRA, you employ a passive IRA custodian to direct the investments. Then, you establish a limited liability company (LLC) with the help of a law or accounting firm specializing in entity creation, like MCA Accounting Solutions. Your IRA will be the owner of this new entity.
Once all of this is set up, you establish yourself as manager of the IRA-owned LLC. As manager, you have total control of all of its assets and the authority to invest its money in a number of new ways.
What Can You Invest In?
As long as you follow IRS rules, a checkbook IRA offers the same tax advantages as an institutionally-directed one. Under the LLC structure, you can invest in these alternative investment options:
- Bitcoin and other cryptocurrencies
- Investment real estate
- Limited partnerships
- Non-public businesses
- Precious metals
- Private loans
- Tax lien certificates
What Investment Types Are Off Limits?
Even though the checkbook IRA solution lets you diversify your money across many different asset types, the IRS does prohibit some scenarios. You can’t invest in anything that you collect or consume or that personally benefits you. This includes the following:
- Art and other collectibles
- Life insurance
- Loans to yourself
- Personal property
- Residential real estate that you live in, even part-time
Furthermore, you can’t enter into deals with family members or fund loans for them. Violating these rules on self-directed IRAs voids their tax benefits and can result in IRS penalties.