Serious Risks of a Checkbook IRA

Many investors have taken to the checkbook IRA as a way to have more control over their retirement accounts. While they can present you with unprecedented flexibility, checkbook IRAs do have their fair share of risks as well. Here are a few things to consider about checkbook IRAs and why you will want to be cautious using them. 

Checkbook IRAs

In order to understand the risks associated with a checkbook IRA, you first need to understand what they are and how they work. With a traditional IRA, you are limited as to what you can invest in. The IRS prevents you from investing in life insurance or collectibles. They also prevent you from using the IRA to purchase property for your current or future personal use.

In addition to those limitations, many IRA providers also do not allow certain other things as investments. For example, many of them do not permit you to invest in real estate with your IRA because they will not make any money off of the deal. With stocks, bonds and mutual funds, they will make a percentage off of each purchase or sale. 

With a traditional IRA, you will have a custodian that holds the money for you and looks over every transaction that you make. The custodian will tell you what you can and cannot invest in.

With a checkbook IRA, you can set up an LLC (Limited Liability Company) and invest in it with funds from your IRA. You can conduct business deals through the LLC and pass all of the profits on to the IRA. This allows you to simply write a check for any investments through your LLC. This negates having to pass every investment through a custodian before you do it. 

Bad Investments

One of the serious risks of this type of retirement account is that you will choose bad investments. When we have more options, we tend to get into things that may not be to our advantage. You might choose something just because you can instead of because it is the best investment vehicle. Even though the stock market might be boring, the value of stocks has been proven, and you can get wealthy by investing in them. There are many other investments out there that may not provide the kind of return that you want. You might decide to start a franchise with your investment funds. If the franchise fails, as many do, your entire retirement portfolio could be gone. 

Invalidation of IRA

There are many possible investment scenarios out there for you to undertake. If you choose to invest in whatever comes along, you could possibly invalidate the IRA and risk penalties with the IRS. For example, you might invest in something that is considered a collectible and invalidate the IRA. You might even be convinced to get involved in a deal that involves property for your personal use. This would negate the tax benefit of the IRA.

While having an IRA custodian might seem unnecessary or like facing a hindrance, custodians are really there for your best interest. They know what you can and cannot do with funds from an IRA, and they can help. If you start a checkbook IRA, you are ignoring their available expertise. 

blog comments powered by Disqus