Do you actually need a checkbook control IRA to fund deals quickly

Question

Custodians commonly quote two paths for a self-directed IRA. A basic account runs a modest annual fee plus per-asset and wire fees, with the custodian signing every document. A checkbook control package involves a larger setup fee and a higher annual fee, with an LLC established inside the IRA so the account holder signs documents directly. A claim worth checking carefully is that checkbook control keeps an investor out of UBIT, unrelated business income tax. That doesn't hold up on its own: the LLC is generally disregarded for tax purposes, meaning it's treated as part of the IRA rather than as a separate structure, and a disregarded entity doesn't change what triggers UBIT. Debt-financed income or active trade or business income inside an IRA can still trigger UBIT whether or not there's an LLC wrapper. For an investor doing only one or two transactions a year, such as land-backed notes or a single land fund position, the extra cost of checkbook control is often hard to justify. The basic custodian path, with its per-transaction fees, tends to come out ahead at low volume, and the checkbook structure earns its cost mainly at higher transaction frequency where per-asset fees would otherwise add up fast.

Rena Guide · Accepted Answer

The blog is wrong on UBIT and right that the LLC is disregarded for tax. Those two things can't both do what it claimed.

Start with the terms. In a custodian-directed account, the custodian holds title to your IRA's investments and signs the documents. Your note would be vested in something like "XYZ Trust Co. FBO Parcel IRA," and every wire leaves their office. With checkbook control, your IRA buys 100 percent of a newly formed single-member LLC, that LLC opens a bank account, and you sign as manager. People call it a checkbook IRA or an IRA LLC. The strict meaning is just that structure. The loose usage is people saying "checkbook" when they only mean fast funding.

Because the LLC is disregarded, income flows to the IRA exactly as if the IRA held the note directly. Interest stays outside UBIT either way. If the LLC borrowed money or ran an active business, UBIT would show up either way too. The wrapper changes who signs, not what's taxable.

Two things that catch people. You can't pay yourself for managing the LLC, and you can't put personal money into it, since the LLC is IRA property and you're a disqualified person to your own IRA. And LLC formation and annual fees vary a lot by state, with some states charging an annual franchise tax on top of the custodian's $400, so price your own state before comparing packages.

For one or two notes a year, most people find the custodian-directed account cheaper and slow enough to live with. Ask the custodian in writing how many business days they need from receiving signed docs to sending the wire.

dpatel_re · Answer

The LLC doesn't change anything about how the loan itself gets underwritten, which is where the actual money is at risk. What it does change is the annual reporting chore. The custodian still needs a year-end fair market value for whatever the IRA holds, and if the IRA holds an LLC instead of a note, that means valuing the LLC. Most custodians charge a per-asset holding fee in the $75 to $200 range and will ask for a valuation form every year. One note is one form. Ten notes inside an LLC is one form, which is the real convenience nobody mentions in the sales call.

renee_dubois · Answer

Ask the custodian what their funding turnaround actually is. Two business days after receipt of signed originals is a common quote, and it's rarely actually two days.

omar_haddad · Answer

Different flavor of the same trap, but worth having in your head since you mentioned land. If the IRA ever ends up owning dirt instead of paper, you cannot pay for the survey or the brush clearing off your personal card and get reimbursed later. Every dollar has to come from the IRA. I've watched people treat a $400 invoice as too small to matter, and the size of the bill has nothing to do with whether it's a prohibited transaction.

kevin_lombard · Answer

Does the LLC need its own EIN and its own bank account, or can it share the custodian's account? I read the LLC is disregarded and then assumed that meant it doesn't need its own anything, which now sounds wrong to me.

chriswalton8 · Answer

@kevin_lombard it needs both. Disregarded is a tax word, it doesn't mean the bank will let an entity with no EIN open an account. Parcel, the reason the checkbook package gets pushed so hard is that it's a higher-margin product for the promoter. That doesn't make it bad. It does mean the person quoting a $1,300 package isn't neutral. The published cases involving people getting burned with these usually involve the owner treating the LLC account like a personal one, guaranteeing something, or drawing a management fee.

sonia_alvarez · Answer

For one or two notes a year, a custodian-directed account is usually the right call. A typical setup runs about 30 dollars a wire plus a flat annual fee, and the paperwork per loan is a funding authorization plus the note and security instrument. That is an afternoon, not a structure.

aaron_fitz10 · Answer

Where is the crossover, though? For someone making six or eight small loans a year, say 25k each, does the LLC start paying for itself in fees, or is it mostly about the speed?

hannah_west29 · Answer

@aaron_fitz10 run it on paper. Custodian directed at roughly $300 base, say $150 per asset per year, $30 a wire, puts two notes around $660 a year and eight notes around $1,740 a year, every year. Checkbook control runs about $1,300 up front plus $400 annually, plus whatever the state charges the LLC, call it $500 all in each year after the first. At two notes checkbook control never pays back. At eight it's ahead inside the first year and further ahead after that. That ignores an investor's own time, which is usually the part people actually care about, and it ignores that checkbook control means an entity to keep in good standing.

joe_delgado5 · Answer

Speed is not a small thing if you're funding anything with a short fuse. A seller-side deadline doesn't care that your custodian needs originals by courier.

bmoreno23 · Answer

Basic question I'd rather ask here than there. When the IRA "buys" the LLC, is that money leaving the IRA? I keep picturing it as a withdrawal and I'm sure that's not how it works.

Do you actually need a checkbook control IRA to fund deals quickly

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