"Checkbook control" is one of the most hyped ideas in self-directed IRAs. It can be useful. It's also easy to get wrong. Here's what it really is.
What it is
With a regular self-directed IRA, every investment goes through your custodian. You send them a request and the paperwork, they review it, and they send the money.
With checkbook control, your IRA owns a small company, usually an LLC. You manage that LLC. The LLC has its own bank account, and you write the checks for its investments yourself.
What it's good for
- Speed. If you buy a lot of real estate at auction, or deals that close fast, you don't wait on a custodian for each one.
- Fewer per-deal fees. Custodians often charge for each transaction. With an LLC, those drop.
- Day-to-day control. Paying bills on a rental, for example, is simpler from the LLC's account.
What the hype leaves out
- You still need a custodian. The IRA itself must be held by a custodian. The LLC sits inside it.
- It costs money to set up and run. Expect fees to form the LLC, yearly state fees, and custodian fees on top.
- You become the record keeper. Every dollar in and out of that LLC has to be tracked and kept separate from your own money.
- One mistake can blow up the IRA. Pay yourself from the LLC, use its money for something personal, or do a deal with close family, and the IRS can treat the whole IRA as withdrawn. Taxes and penalties follow.
- "Privacy" is limited. Investments are in the LLC's name, but LLC records are often public, and your custodian and the IRS still know exactly who owns it.
- No one is watching your back. No custodian review means no second set of eyes before money goes out.
Do you need one to lend on notes?
No. A regular self-directed IRA can lend on mortgage notes just fine. Your custodian signs the documents in the IRA's name, sends the money, and the interest comes back into your IRA. One loan doesn't need the speed or the extra structure.
Checkbook control makes the most sense for active investors doing many fast deals, who are comfortable with the paperwork and the rules. If your goal is to lend and let someone else do the work, a regular self-directed IRA is simpler, cheaper, and safer.
Not sure which IRA to use? Read Traditional vs. Roth self-directed IRAs, or see how IRA lending with LJH works.
General education, not tax, legal, or investment advice. IRA rules are strict and change over time. Talk with your custodian and a CPA or tax attorney before you set up any IRA structure. All investing has risk, including loss of principal.