Risks with the Checkbook IRA (LLC)

[Bill Humphrey]

I have seen several questions and comments about the advisability of using the Checkbook IRA LLC structure. Although there are a number of firms pushing the idea we always try and point out the potential danger of doing so.

My main worries are four things:

The structure is easy to abuse, which means that people are doing so. That puts the owner of the account in the same boat as those abusers and potentially subject unwelcome IRS attention.

The structure encourages the provision of services to an entity owned by the IRA, which is prohibited. Often noting that the provision of those services saves the IRA money. Those accounting and other services could easily be deemed prohibited and thus disqualify the IRA entirely.

Managers of the entity often don't realize or pay attention to the entity itself. We often see an LLC which has no books or records of any kind, other than bank statements. The LLC is a legal entity and needs to be managed like any other. Perhaps with even more attention since it is IRA money. There are often tax filings that are not prepared and or the owner (the IRA) does not report taxable income that is being passed out of the LLC to the IRA.

Lastly, promoters often refer to the Swanson decision and various IRS memorandums as verification of the validity of the structure. While there are references to setting up an entity and being the manager, the IRS and the courts have never said that you be the accountant manager providing services to an entity. You can always be the decision maker, but that is different than the person sitting down at the computer every month/quarter/year to reconcile quickbooks and prepare statements, tax filings, and other managerial duties.

[Bill Humphrey]

Both of those duties fall upon the plan trustee so you can't separate them within the plan.

Consulting someone prior to the transactions is probably a great idea. The trustee is responsible even when you do use an outside advisor. You can buy the advise you need ala-carte. Provided you know when you need it.

We see people who do a transaction once every 6 or 12 months. And it is easy to forget the rules and start to apply common sense instead. Seems logical doesn't always apply to the IRS rules though.

Qualified plans and particularly those for company owners without employees are a great tool if you are careful with the rules.