When a Checkbook IRA Makes Sense — and When to Avoid It

A checkbook IRA is a self-directed retirement account that owns a limited liability company. The IRA owner controls the LLC’s bank account and can buy real estate, private placements or cryptocurrencies without routing each transaction through a traditional custodian.

Investors use the structure to hold alternative assets that most large brokerages and fund companies do not allow inside standard IRAs. Proponents cite the ability to keep an owner’s name out of public property records, to add a layer of liability protection and to pay flat administrative fees rather than ongoing asset-management charges.

The accounts also raise tax and compliance issues. If a self-directed IRA invests in a business that operates and produces active income, the account may owe unrelated business income tax on those earnings. IRS prohibited-transaction rules bar account holders from self-dealing, including using IRA-owned property for personal benefit or holding assets in which they have a 50% or greater personal interest.

Advisors who help set up or oversee these accounts face potential legal exposure. Ed Slott, founder of an IRA consultancy in New York, warned that advisors who are involved could be drawn into disputes if a client faces an audit or penalty. He recommended steering clients to specialists and making clear that the client bears responsibility for compliance.

Firms that specialize in self-directed IRAs say the structure can be appropriate for specific clients. Adam Bergman, founder of a company that sets up checkbook IRAs, noted his firm uses LLCs for real estate to protect privacy and limit liability and that the firm charges flat fees. He reported no client audits or compliance challenges in the past 16 years.

Other advisors said they rarely see situations that require a checkbook IRA. Chris Wilkens, a wealth management chief in San Francisco, said he has not found many use cases in 25 years. David R. Silversmith, a private-client manager in New York, said the strategy is not worth the effort for most clients.

Practical drawbacks include loss of a step-up in basis that heirs might receive for property held outside an IRA, the need for periodic appraisals of nonmarket assets, and limited liquidity inside a retirement account. Ryan McKeown, a senior vice president at a wealth firm in Minnesota, suggested that clients older than 59½ who have no other liquid funds might consider taking a distribution to buy rental property personally.

Many mainstream custodians do not facilitate alternative investments in standard IRAs and generally decline to act as fiduciaries for investment outcomes in self-directed accounts. Some advisors refer clients to specialized custodians and keep any self-directed IRA separate from managed retirement accounts they oversee so that compliance risk rests with providers that focus on those structures.

Self-directed IRAs expand investment options beyond stocks, bonds and mutual funds, but they require careful adherence to IRS rules on prohibited transactions and unrelated business income. Qualified charitable distributions remain a service offered by most mainstream custodians even when they decline to support other alternative investments.