A Check Book IRA is a combination of a Self Directed IRA owning an LLC (Limited Liability Company) with YOU being the manager of the LLC. We use an LLC because it is a business entity that is a cross between a corporation and a partnership and is the PERFECT investment vehicle for your IRA! There are no tax returns to file nor any meetings, minutes or resolutions required.
The IRA will own 100% of the LLC and this makes it a “flow through” tax entity. This means the owner, or the IRA, pays the taxes. The LLC itself will not pay any taxes, rather, it’s the owner of the LLC that is liable. But in this case, the owner is your IRA. So, if the LLC has earned the profits they pass to the IRA and there’s no tax until you take an IRA distribution.
The LLC does all the investing so you have control over all the investment decision. You must follow the guidelines in the LLC’s Operating Agreement.
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In the 1996 case of Swanson vs. Commissioner, the tax court gave its blessing to a new type of self-directed IRA structure — the checkbook IRA — that is much simpler than investing through a regular custodial account.
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