Getting Started FAQ
What are Checkbook-Control Retirement Accounts?
Checkbook-control retirement accounts enable you to directly control your retirement funds using a bank checking account. This access to your investable assets provides liquidity and enables you to pursue a variety of investment strategies – that are unavailable in a traditional account – on a tax favored basis. Learn more about self-directed retirement accounts.
What are some examples of investments and asset classes that are available to checkbook retirement accounts?
Examples of permissible investments are real estate, tax liens, private lending, merchant cash advance, asset-based loans, private equity, consumer lending, and litigation finance. Examples of prohibited assets are collectibles, which includes art, rugs, antiques, metals, gems, stamps, most coins, and alcoholic beverages. Learn more about alternative investments.
Why haven’t I heard about self-directed retirement plans before? Why hasn’t my CPA or financial planner recommended checkbook retirement plans?
While there are a variety of contributing factors, the root cause lies in the fact that retirement plans have been administered by large broker-dealers whose revenues are derived from stocks, bonds, and other exchange traded securities. Therefore, those firms, and hence all their registered representatives, have reason to restrict participants in their plans to investments that are profitable for them and easily administered by them. Learn more about retirement plan rules.
Can funds from SEP-IRAs, SIMPLE-IRAs, Coverdell IRAs (Education IRAs), and Health Savings Accounts (HSAs) be invested with CheckBook Control?
Yes, SEP-IRAs, SIMPLE-IRAs, Coverdell IRAs (Education IRAs), and Health Savings Accounts (HSAs) can all be self-directed,
If I own a business that has full time employees, can I start a new business to sponsor a Solo 401k Plan?
No, the Controlled Group Rules require that all your businesses be taken into account when determining whether you qualify. However, each scenario must be individually evaluated as the rules are extraordinarily complex.
Prohibited Transactions and Investments FAQ
What are prohibited transactions and how do those impact checkbook retirement accounts? What are some examples of prohibited transactions?
While the tax code allows retirement accounts to invest in nearly all asset classes, it does prohibit certain transactions. Broadly speaking, the prohibited transaction rules prevent individuals from deriving benefit from their retirement funds prior to distribution by disallowing any transactions with “disqualified persons.” Disqualified persons and entities include, among others, the plan owner, members of the plan owners family (spouse, ancestors, lineal descendants and their spouses), any person providing services to the plan, any entity in which the plan owner owns (either directly or indirectly) 50% or more, and any officer, director, 10% or more shareholder, or highly compensated employee of the 50% or more owned entity described above. Learn more about prohibited transactions.
May my Checkbook IRA-LLC or Self-directed Individual 401k have a credit or debit card?
Yes to debit cards, no to credit cards. Credit cards debt will generally have recourse against the retirement plan owner, resulting in an extension of credit prohibited transaction. Debit cards, assuming no overdraft, do not involve credit and their use would not result in a prohibited transaction – just don’t accidentally use it for personal use.
Can the account-holder do rehab work on real-estate owned by an IRA-LLC or a Solo 401k?
No, disqualified persons should not personally do work that would constitute furnishing goods, services, facilities or otherwise contributing value to their IRA-LLC, QRP, or Individual 401k. Of course, service-providers that are not “disqualified persons” to the retirement account may be hired to perform rehab work.
Can a Solo 401(k) or Checkbook IRA borrow funds to invests, such as using a mortgage to finance the purchase of real estate?
So long as the lender has no recourse against the account-holder in the event of default, a Checkbook Retirement Plan may borrow funds to finance investments. If the lender has recourse against the account-holder, meaning the account-owner could be personally liable for the debt, an extension of credit prohibited transaction may occur. Non-recourse loans are available from specialized lenders. In the case of an SDIRA, leveraged real-estate deals may result in UDFI tax (Unrelated Debt Financed Income tax) when a nonrecourse loan is used. One of the great benefits of a QRP, such as a Checkbook 401k, is that real estate acquisition indebtedness does not result in UDFI in many instances.
Can I take a salary as manager of my IRA-LLC?
No, you should not take any form of compensation from your IRA-LLC retirement plan. Although there are extremely limited circumstances under which a disqualified person may take compensation, it is not advisable under any circumstances.
Can a Checkbook Retirement Account do business with the second husband of the account holder’s mother?
The answer is a qualified “yes.” Ancestors (parents, grandparents, great-grandparents) of the account-holder are disqualified persons, but their spouses are not. So, provided there’s no self-dealing, transactions are arm’s length and for the exclusive benefit of your retirement account, doing business with your parent’s spouse (that is not your parent) is an allowed transaction. Note that in contrast with the foregoing, spouses of lineal descendants (children, grandchildren, great-grandchildren) are disqualified persons to the retirement account.
Can a Checkbook Retirement Plan sell property to the account-holders uncle or aunt?
Yes, uncles and aunts are not disqualified persons under the prohibited transaction rules and the retirement plan may do business with them. However, caution is strongly advised, as all transactions entered into by the self-directed retirement account must be for the exclusive benefit of the QRP, 401k, or SDIRA. Therefore, any transaction entered into with an uncle or aunt must be strictly “arm’s length” as a prudent investment for the retirement account, not for the benefit of the account-holder’s uncle, aunt, or other relation – even if that person is not a “disqualified person” to the SDIRA, 401(k), or QRP.
Can a Checkbook Retirement Plan buy property from the account-holders father-in-law or mother-in-law?
Yes, a Checkbook Retirement Plan may purchase property from the account-holders in-laws as they are not disqualified persons under the tax law. However, caution is strongly advised, as all transactions entered into by the self-directed retirement account must be for the exclusive benefit of the QRP, 401k, or SDIRA. Therefore, any transaction entered into with an in-law must be strictly “arm’s length” as a prudent investment for the retirement account, not for the benefit of the account-holder’s father-in-law, mother-in-law, or other relation – even if that person is not a “disqualified person” to the SDIRA, 401(k), or QRP.
Can a Checkbook Retirement Plan loan money to the account-holders brother?
Yes, although a brother is family member, for purposes of prohibited transactions he is not a disqualified person and the retirement account may transact with him. However, caution is strongly advised, as all transactions entered into by the self-directed retirement account must be for the exclusive benefit of the QRP, 401k, or SDIRA. Therefore, any transaction entered into with a brother must be strictly “arm’s length” as a prudent investment for the retirement account, not for the benefit of the account-holder’s brother, sister, or other sibling.
Can a Checkbook Control Retirement Plans transact with disqualified persons if arms-length pricing is used?
No, even if fair market value is paid, Checkbook Retirement Plans may not transact with disqualified persons.
Can I act as the real estate agent/broker and earn commissions on real estate deals in which my Checkbook Retirement Plan invests?
No, earning such commissions could be construed as self-dealing and violating the prohibited transaction rules. However, there are ways to work around this restriction.
Can my Checkbook Retirement Plan provide interest fee loans to non-disqualified persons?
No, retirement funds must be used for the Exclusive Benefit of the retirement account and must be invested to earn a reasonable rate of return.
Can I use my IRA to buy a vacation property?
Yes, but not for personal use prior to having it distributed from the IRA.
Can my Self Directed IRA, 401k, or other QRP partner with other entities, including disqualified person, to invest?
While such transactions may be permitted, they highly increase compliance risk. Such investments should analyzed on a case-by-case basis to ensure compliance with the prohibited transactions rules and general income tax compliance. No compensation or allocation of equity or profits should be given to disqualified persons in exchange for services rendered. All allocations must be pro-rata based on cash invested and all subsequent follow-on investments must follow the initial allocation.
Can I take possession of precious metals & coins purchased by my Checkbook-Control Retirement Account?
While there is a case to be made that you may take physical possession of certain items purchased by an IRA-LLC, the Tax Court, in MCNULTY v. COMMISSIONER OF INTERNAL REVENUE, ruled in favor of the IRS in assessing income tax deficiencies and penalties against a taxpayer that took physical possession of American Eagle coins purchased with IRA-LLC funds. It is strongly recommended that all precious metals and coins be held at an approved depository. Click here to read IRS FAQs and guidance about Gold, Silver, Bullion & Precious Metal IRA-investing and storage.
UBIT, UBTI, UDFI FAQ
Can my self-directed retirement account earn income from short-term real estate flips?
Yes, but if engaged in on an ongoing basis this may result in taxable income to the retirement account. Determining at which point UBIT may apply requires analysis by a qualified professional.
Will a self-directed IRA, self-directed 401k, or other self-directed QRP generate taxable income if it invests in a business that sells goods or services?
It depends on whether that business is treated as a C-corporation for tax purposes. If that entity is a C-corp, the dividends paid to the Checkbook Control Retirement Plan will not be taxable. Otherwise, the pass-through income will represent UBTI to the retirement plan.
What is UBIT? What are UBTI and UDFI?
Unrelated business income tax (“UBIT”) is an income tax levied on tax-exempt entities that engage in an active business that is not related to the entities tax exempt purpose. Unrelated business taxable income (“UBTI”) is income that is subject to UBIT. Unrelated debt-financed income (“UDFI”) is a form of UBTI that is the result of a tax exempt entity using borrowed funds to finance an investment. Retirement plans, as tax exempt entities, are subject to UBIT. An important distinction between IRAs and Qualified Plans (401k plans and Defined Benefit Plans), is that Qualified Retirement Plans have a limited UDFI exemption with regard to leveraged real-estate transactions. Learn more about UBIT, UBTI, and UDFI.
Will an investment into a REIT result in UBIT?
No, it generally will not, as indicated in IRS Revenue Ruling 66-106.