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Checkbook IRA - The Pros and Cons

John Anderson | October 11, 2021

Checkbook IRAs - Checkbook Control Self Directed IRAs

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.

A Self-Directed IRA with ALL the Benefits of Home Storage and NONE of the Drawbacks

For investors who want to allocate a portion of their savings in gold, silver, and other precious metals without the risk of a Home Storage IRA, then self-directed IRAs managed by an authorized IRA custodian could be just what you are looking for.

There are four of the key differences between a Home Storage IRA and a Self-Directed IRA that are quite beneficial.

#1: Legality

Self-Directed IRAs managed by an authorized custodian and not using a Checkbook IRA were confirmed by the IRS in their 1996 court case the IRS v. James Swanson as the best legal option for real estate and precious metals (as mentioned earlier in this article).

#2: Administration

Home Storage IRAs force the account owner to take on full liability for the ownership, administrative fees, and management of their account. Some things to consider are the pending changes to the law before Congress which could make home storage IRAs prohibited transactions under IRS rules in the future, legal counsel and fees, lack of investment guidance, increased tax liability, and more.

A Self-Directed IRA managed by a qualified custodian doesn't have ANY of those issues. You will also have a legal IRA custodian to administer your account and work with you to develop the right account structure. As the account holder, you are still in full control of your investment decisions, but having qualified professionals who work in this area every day keeps you from dealing with all the risks and hassles of home storage.

#3: Approved Precious Metals

With home storage IRAs, if you do not make yourself the trustee, which has legal complexities of its own, you can put at risk your tax-deferred benefits. Also, home storage IRAs metals are limited to American Eagle coins only.

A Self-Directed IRA administered by a professional custodian, such as GoldcoAugusta Precious MetalsBirch Gold Group, or Regal Assets, gives you many more types of gold, silver, platinum, and palladium to choose from to add to your retirement plan.

#4: Government Regulation

A huge plus with self-directed IRAs is that you can remain out of IRS scrutiny.

As opposed to very detailed records and documentation and over-the-top regulations by the IRS for Home Storage IRAs, the account holder of a Self-Directed IRA who uses a professional custodian does not have any of these issues:

● Inaccurate calculations that lead to unplanned distributions or loss of tax-deferred status are nearly zero

● No lawyers, no legal advisor, or accountants are necessary

● No IRS audit, audit risk, or reporting fees

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GoldCo Investments

Company recognized as GOLD STEVIE® AWARD WINNER on April 29, 2021

In excess of 250 professionals from around the globe took part in the judging process to select this year’s Stevie Award winners. Some of their comments about Goldco’s achievements over the last year included recognition for the company being “an excellent firm which offers customers exemplary service for those who are interested in diversifying their retirement portfolios.” They concluded that “investing for retirement can be complex and uncertain, but it doesn’t have to be with Goldco.”

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Birch Gold Group

Best company in empowering clients

When you contact the company, you will be given an investment specialist to work with who will go over the stock market and how it can impact gold prices, precious metals and your IRA. They empower you to make educated decisions about your retirement objectives and to assist you to completely understand what is possible and the associated risks with any investment.

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