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CHECKBOOK IRAINVESTINGGUIDEFind out aboutCheckbook IRAInvesting

Checkbook IRAIntroductionSome IRA investment strategies require a large number of disbursements from the IRA and/or the need to disbursefunds quickly. To achieve this level of flexibility, some IRA investors choose a strategy called Checkbook Controlwhich creates the ability of the IRA holder to write checks with IRA money. This structure is sometimes referredto as a Checkbook Control IRA, a Checkbook IRA, or a Checkbook LLC. Compared to a direct IRA investment, theLLC approach will likely involve additional set-up time, expenses (ideally offset by fee savings), operationalresponsibilities, and risk tolerance.The set-up of Checkbook Control, starts with the fact that the IRS allows an IRA (Traditional or ROTH, SEP orSIMPLE), Solo 401(k), HSA, or ESA to invest in an entity (in any percentage), as an investment while keeping thetax benefits associated with that account type. This entity can be a “closely-held” entity, meaning that the IRAholder or another disqualified person is the manager of the entity.NDTCO as custodianFBO Client’s Name IRAOwnsClosely Held Entity(LLC, LP, Trust, etc.)OwnsCashAssetsLiabilitiesThe most common iteration of Checkbook Control starts with the IRA holder having an entity created such as anLLC, C-Corp, Limited Partnership, or Trust. The IRA can’t be a member of an S-Corp or be a General Partner in apartnership. The IRA then buys 100% interest in the entity (let’s call it an LLC), meaning the IRA provider sendsa check made out to the LLC. With the funding check and applicable documents in hand, the IRA holder thenopens a checking account on behalf of the LLC. Once open and funded, the entity may access the checkingaccount to initiate investment activities.ndtco.com 877.742.1270 [email protected] p.2

Checkbook IRAWhy is Checkbook Control Considered a Gray Area?The court case that is most often pointed to when discussing the legality of a closely-held entity is Swanson vs.Commissioner 106 T.C. 76 (1996). Mr. Swanson was operating a closely-held LLC where his IRA was the soleshareholder, and he was named manager after creation. Mr. Swanson was suing over legal fees incurred whenthe IRS tried to claim that his IRA was involved in a prohibited transaction. While the lawsuit was mainly regardingrepayment of attorney fees, it did raise questions as to whether this structure is allowable- can the IRA whollyown an entity; can the account holder act as the manager over their retirement funds, and can the asset retainits tax-free or tax-deferred status?The IRS lost the lawsuit and later released documents affirming the ruling and expanding further on some of therules about transactions that the entity can participate in. Much is left unknown as to some of the legalities of thestructure. Though the structure is considered legal, it can be scrutinized on the dealings and purchases the entitymakes. The flexibility of checkbook control will require additional care by the IRA holder in avoiding prohibitedtransactions, but it is important to remember that the closely-held entity is an asset among your portfolio of selfdirected assets. As such, your responsibilities as the plan holder of a Checkbook IRA will be no different than thecustodian that typically holds the investments made by the entity. The account holder will have to understandthat the rules remain hard and fast, regardless of the structure being used for the investment.Benefits of Checkbook IRAs Having a bank account set up in the name of the closely-held entity allows for quicker reactions andmore control for paying expenses and making investments.Lower fees from IRA Custodians, but bank and bookkeeping fees may or may not outweigh IRA provider fees.The manager of the entity has power over signing investment documents for any purchases that theentity makes with the IRA funds.Titling InstructionsWhen the IRA becomes a member/partner/etc. of the entity, the membership is titled in the name of the IRA.NDTCO as custodian FBO John A. Smith Trad IRA (or NDTCO as custodian FBO Account Number 123456)Address: 1070 W. Century DriveLouisville, CO 80027Once the entity is in place and active, all investment documents will be in the entity’s name. The designatedbusiness address, contact information, and Tax Identification Number will be unique to the entity as well.Cash FlowAll expenses related to the setup of the entity (including Attorney Opinion Letter) are paid by the IRA. If UBIT isdue on the IRA investments made by the LLC or entity, that tax is paid by the IRA.Should the account holder want to take a distribution from the IRA, the funds must be at NDTCO to be properlyrecorded and reported. Any distributions taken directly from the entity’s bank account is considered a prohibitedtransaction and could have tax consequences and the possibility of penalties from the IRS.ndtco.com 877.742.1270 [email protected] p.3

Checkbook IRACapital Calls & Additional FundingsA capital call, installment or additional funding is very similar to the initial purchase process. Should yourCheckbook IRA investment require a capital call or additional funding, New Direction Trust Company can assistwith the process. Please note that additional funding depends on whether or not the operating agreement of thecompany allows for it. Please contact our offices with any questions regarding this matter.Important Things to KnowThe entity manager will be tasked with the creation of the entity and filing all of the necessary documentationfor the entity. It is highly recommended that you consult a competent attorney or tax professional that is familiarwith retirement accounts, tax law and IRS rules to create the entity documents, although this is not a requirement.New Direction Trust Company requires an Attorney’s Opinion Letter be provided for these structures, if you,the IRA holder, or another disqualified person will be appointed manager of the entity after the funding. TheAttorney’s Opinion Letter must affirm that, according to IRC 4975, the funding of this structure does notconstitute a prohibited transaction.A Checkbook Control IRA that is managed by the IRA owner is considered a “high risk” investment because yourIRA funds are in a checking account that you control. Not only is it important that these funds be used solely forthe IRA and its assets, there can be absolutely no “self-dealing” with regard to the assets purchased or servicesprovided to the asset. As the manager or trustee of the entity, it is also your responsibility to understand theProhibited Transaction rules as stated in IRC 4975.IRC Section 4975: Prohibited TransactionsBecause you are still using tax-advantaged funds for the entities investments, all of the rules do still apply foreach asset class. IRC section 4975 applies to each investment the entity makes.When an IRA buys into an entity, that entity is required to comply with the IRS prohibited transaction rules.These rules also apply to any entity that a disqualified person owns or controls.Disqualified Persons spouse daughtergrandson877.742.1270 [email protected] p.4

Checkbook IRAThese Disqualified Persons Cannot: Directly or indirectly receive benefit from the investments that the entity makes with IRA funds. This caninclude:- Living or operating a personal company in a piece of real estate the entity owns.- Accepting investments from the entity by a company a disqualified person owns and controls.- Receiving a loan from the entity.- Doing any contract work for the entity and its investments.Purchase or sell shares of the entity between any of these persons and the IRA.Be employed by or receive compensation from the entity.Pay expenses on behalf of the entity or be reimbursed for any expenses by the entity.Entering into a prohibited transaction, such as providing goods or services to your IRA-owned entity or makingloans, advances or other transactions with your IRA-owned asset, will typically result in your IRA beingdistributed to you as of January 1st of that year.A distribution results in you having to pay income tax and/or penalties and interest on the amount distributedeffective that year. Because the prohibited transaction may not be discovered right away, penalties and interestcan potentially go back multiple years.Due DiligenceBecause neither the IRS nor NDTCO researches or endorses any investments, the IRA holder is responsible forperforming due diligence on all their investments. Visit our website for more information on due diligence andways to protect yourself from investment scams. A competent professional in the legal, financial, or accountingfields can also be engaged if you need additional advisement. Any of these legal professionals can assist indeciding if the investment being considered is legitimate, meets your risk tolerance parameters, and is right foryour investment goals.Fair Market ValuationsThe entity must be valued annually. The IRA holder is responsible for delivering this information from a third party.A value of each asset within the entity is required in order to determine the value of the entity as a whole, as wellas supporting documents showing that they are correctly titled to the entity.Real estate assets owned in an entity must be evaluated by a third party using the same standards as if it wereowned directly by the IRA.Other assets such as bank or brokerage accounts should have year-end statements proving their value.If you need further guidance on how to determine the value of the entity, consult your accountant.K-1s are not acceptable valuations because they represent the book value of the company which is based onhistorical cost less depreciation.ndtco.com 877.742.1270 [email protected] p.5