can use it to invest in real estate and other nonpublicly traded assets. The rules are the same for convention- al and self-directed IRAs. It’s what’s con- tained in the accounts that is different. But just because the accounts are es- sentially the same and you invest in real estate, doesn’t mean that a self-directed IRA is the right option for you. MORE CONTROL MEANS MORE RESPONSIBILITY It takes more than just expertise in real estate investing to be successful with a self-directed IRA. You have to educate yourself on what the IRS will and will not allow, and you have to be
For auctions that don’t have this capa- bility, Next Generation Trust Services has provided clients with checks in various amounts, so they can pull out the check in the amount they need. There are ways to get the benefits of a checkbook self-directed IRA without the pitfalls. For example, some people see it as a way to avoid custodian fees, which can add up depending on how many checks need to be written each month. An ef- ficient way around this is to pay a lump sum in advance. So, instead of paying a $5 fee every month for a year ($60) to have the custodian write 12 checks for HOA fees, you could request one check for the year and pay $5 once. Another argument for checkbook self-directed IRAs is that they offer asset protection since the asset is held within an LLC. If you hold five properties in your self-directed IRA and are sued by the tenant in one, a judgment against you could result in the liquidation of all the assets in your retirement account. To avoid this, you can structure your investments, using self-directed IRAs, in such a way that you would have similar protection. If you have three properties, you could put each one in a separate self-directed IRA and then set up a fourth self-directed IRA to hold your cash reserves. (Not to mention, you should have hazard and liability insurance anyway.) AVOID MISTAKES WITH THE RIGHT GUIDANCE So why should you think twice about setting up a checkbook self-directed IRA if you don’t already have experi- ence with self-directed IRAs? It’s very easy to make mistakes that could jeopardize the tax-exempt status of your account if you don’t have a custodian watching out for you. Most prohibited transactions take place in these LLC/checkbook accounts because people don’t realize they’re doing some- thing they can’t do. You can’t self-deal, meaning you can’t do business with your asset. That vacation property you bought as
actively involved with your investments. A self-directed IRA gives you the freedom to purchase assets you’re an expert in, but with this freedom comes responsibility. If you are the type of person who likes to set it and forget it, then this strategy is not for you. But you can be overly involved in your investments, too. Checkbook self-directed IRAs are promoted as an option to give you more control and more flexibility, as well as cost savings, but can be dangerous in an inexperienced investor’s hands. Any self-directed IRA can be turned into a checkbook self-directed IRA. In- stead of relying on a custodian to manage your self-directed IRA account, you set up a limited liability company (LLC), pref- erably with the assistance of an attorney experienced in this area. As the owner, you will open a bank account for the LLC. This is seen as an advantage when you invest in real estate. When you want to buy a property or pay a mortgage with a self-directed IRA, you have to go to your custodian and ask for a check. If you have a checkbook self-directed IRA, however, you simply write one yourself. And it’s free. With a self-directed IRA, your custo- dian would write a check for a fee. Proponents argue that because they can write checks themselves, they can jump on deals that they might otherwise miss if they had to go to a custodian for funds. However, it is rare that you would miss out on a deal. Real estate doesn’t move very fast. Typically, when a Next Generation Trust Services client needs funds for a down payment, he or she can get a check the same day. You can see a property that morning and put a down payment on it by the end of the day. After that, there may be several days of back and forth before you even sign a con- tract, and then it’s going to be weeks before you need to bring in the final amount. FLEXIBLE OPTIONS WITH SDIRAs But what if you want to buy at auc- tion? Many counties and states allow you to deposit funds online before the auction, so the money is already there.
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