Checkbook IRA

Are you looking to open a Checkbook IRA? Find out how it differs from a Custodial IRA and whether it’s a good fit for your assets.

Self Directed IRAs – Two Models 

A Self Directed IRA is a specialized investment account. It allows you to diversify more freely and use retirement funds to invest in almost any asset. Like many financial instruments, a Self Directed IRA has a number of variations. Although every Self Directed IRA must be held by a Custodian, the processing of the IRA and its investing mechanics can vary. Your choice of platforms will depend on the assets you wish to acquire. In this article, we’ll look at the two most popular models: a Custodial version and a Checkbook IRA.

Custodial Self Directed IRA

The Custodial model is more popular for simple investments, i.e. those with minimal transactions. Examples of simple investments include: 

  • investing in a real estate fund 
  • purchasing private stock 
  • lending funds to a 3rd party 

These kinds of investments can be performed directly through the Custodian in an easy 2-step process. 

  1. Provide Madison Trust the instructions of where to send the funds. 
  1. Provide a copy of the Investment Documents (Subscription Agreement, Stock Purchase Agreement, Promissory Note, etc.) to Madison Trust so we can make sure the investor is titled as your IRA. 

The Custodial model is popular because it is economic to set up and relatively easy to use. For one-time investments that are relatively transaction free, it’s a great choice. 

Checkbook IRA 

For investments that are transaction heavy (like rental properties), the Checkbook IRA is the preferred vehicle. This is because the Checkbook IRA gives you the ability to manage the cash on your own and not have to go through the Custodian for each transaction. Each rent payment, repair, or administrative task can be handled by you directly without having to pay any fees. 

How the Checkbook IRA Works

In the Checkbook Model, an LLC is created which lists your IRA as the Sole Member and you as the manager. Madison then helps you setup a dedicated checking account for the LLC at your local bank. Once the account is up and running, Madison sends the funds from your IRA to the LLC.  

Your IRA owns the LLC, but you are the manager of the LLC. This means that you can go ahead and purchase a property (it will be titled to the LLC), as well as manage all cash flow right out of the LLC Checking Account. For example, when your tenant pays rent, the funds will be deposited into the LLC Checking Account. If you need to pay a plumber, you would write a check from the LLC Checking Account. 

Advantages of the Checkbook IRA 

Checkbook IRAs provide a number of great benefits that are essential for specific assets. 

  • Timing – For investments where speed is of the essence, the real time capability of the Checkbook IRA is very important. It enables investors to jump on short-lived deals without having to wait for the processing of a middleman. 
  • Pricing – Although the Checkbook IRA costs more to set up, it will usually recoup those costs by avoiding transaction fees. In the Custodial version, investors have to pay a transaction fee for every action that the Custodian executes on their behalf. In the Checkbook IRA there are no transaction fees as the account holder is independently performing the transactions.  

Choosing the Best Self Directed IRA Model 

Unless you’re an experienced Self Directed investor, it’s best to discuss your choice of platform with a CISP-trained Madison Specialist. She will be able to evaluate your goals with Self Direction and then recommend the most appropriate platform. Self Direction is a powerful tool and you can harness Madison’s expertise to make it work for you. 


For more information about Self Directed IRAs call us at 800-721-4900 or schedule an appointment with an IRA Account Specialist.

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Getting started is easy

1

Speak with a specialist

You’ll be asked a few simple questions to make sure that a Self Directed IRA is your best option.

2

Open an Account

Madison will guide you step-by-step through the process, including any necessary transfers.

3

Invest

Your funds will be invested directly into the asset of your choice.


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