Checkbook IRA - The Pros and Cons

If you are not familiar with a checkbook IRA, it is a self-directed IRA where you use your retirement funds to create profits. You can do that by owning real estate or owning a business, property, or something else that generates income within an individual retirement account. This is known as a self-directed IRA LLC. One word of caution, the IRS is not a fan of the self-directed IRA LLC.

The profits from a checkbook IRA stay in that IRA account. When you want to invest in precious metals using the checkbook IRA route, it is more commonly known as a home storage IRA. This is where you would invest in gold, silver, and other precious metals and store those metals at home.

At first glance, it might seem easy and straightforward, but opening an account, complying with IRS regulations, and managing those accounts can be rather difficult.

In September 2021, a US Congressional subcommittee passed additions to the 2021 Budget Reconciliation Act. These additions would effectively dissolve checkbook IRA accounts and become quite a burden on existing checkbook IRA accounts.

A section in the language under the proposed bill, “Subpart B: Other Provisions Relating to Individual Retirement Accounts” tells about changes on how the Checkbook IRA will work. High-wage earners will be restricted to how much they can contribute to a retirement account, including a checkbook IRA, home storage IRA, and a self-directed IRA. The changes also include Roth IRAs and what amounts can be rolled over into them.

History of the Individual Retirement Account

In 1974, Congress passed legislation creating the first individual retirement account. In 1996, there was a landmark legislative case in the IRS v. James Swanson. The case has come to be known as the Checkbook IRA court case is which Mr. Swanson prevailed over the IRS.

New Rules To End The Checkbook Control IRA

Until this new legislation passes, investors in gold, silver, and other precious metals are still able to use checkbook IRAs/home storage IRAs directly for their retirement funds.

Some people create this LLC (limited liability company) for the sole purpose of buying precious metals. In most cases, the self-directed IRA owner is also the owner of this checkbook IRA LLC entity, allowing the “business owner” to use the company’s checkbook to buy the IRA investments.

Sec. 138314 of the Budget Reconciliation Act proposal directly puts a bullseye on this type of action to invest your retirement funds.

Rule 1: Company Ownership

At the present time, no one can own or control more than fifty percent of a company or piece of real estate property within an IRA. However, the owner creates and keeps a near-majority stake in it for the purpose of buying and holding precious metals. This is how the checkbook IRA process works today.

The proposed legislation will reduce the ownership level to less than ten percent. This makes it virtually illogical to start a business for the sole purpose of purchasing gold and silver and having checkbook control of the investments within the account.

Rule 2: IRA Owner Prohibited from Holding Office

The new proposed legislation also prohibits any IRA holder or owner from holding an officer position in any company held within an IRA. That means that the person who owns the IRA (IRA holder) can not be the majority owner or a decision-maker in their own self-directed IRA LLC.

Rule 3: Risk of IRS Fines and Taxes

Since the IRS v. James Swanson court case in 1996, the IRS has only been allowed to dispute the ownership and management of these checkbook IRAs and alternative investments in real estate and precious metals.

With this new legislation, the IRS can take actions the same as it did against James Swanson and claim the IRA ownership broke “IRS prohibited transactions.” for any gray area. It also includes language that permits the IRS to completely dissolve a self-directed IRA account it finds in violation of its policies. So, if the IRA administrator strays even a slight bit beyond these new rules, they could lose their IRA and face heavy fines and taxes or tax liens for their mistake.

Checkbook control IRAs will not last under these proposed rules. If the legislation passes, it will go into effect at the start of 2022. For checkbook control IRAs already invested in real estate, or alternative investments such as gold, silver, or other precious metals, the IRA owner will have to do their due diligence and untangle their investment positions or ownership stakes before the end of 2023. The account owners will want to consult their tax advisor on the next steps.

Does This Effect All Precious Metals Investors?

No. For the vast majority of real estate investing or gold, silver, and other precious metal investors, it shouldn’t change anything. On the other hand, if you own a checkbook IRA, it changes everything.

Luckily, if you haven't opened a checkbook IRA there's an alternative approach with an IRA custodian, better investment options that don't come under the same IRS scrutiny.

When you are looking for prospective investments, do your due diligence and take a look at the best gold IRA companies. Here you will see where to get sound advice from professionals with a track record of helping clients diversify their retirement accounts and develop an investment structure that is right for you.