Self-Directed IRA Custodians are not all created equally. You need to carefully check out your self directed IRA custodian. I have seen a number of cases this past year where the IRS is coming after people because of what they have done with their self directed IRA.
When the self directed IRA industry caught on in a big way about fifteen years ago, there were a limited number of custodians and they seemed to be a lot more interested in following the law. Today, it’s more of a free for all. The philosophy of the industry in general is “Tell the dumb IRA owner whatever they want to be told, and sign up their account.”
Checkbook IRA is a NO NO
I have written a number of articles on checkbook IRAs and LLC/IRA combinations. The short story is the checkbook IRA is a NO NO and the LLC/IRA combination had better be structured and operated very carefully or the IRS will disallow it. The operating agreement of an LLC is the key to operating the company and complying with the asset protection and tax laws. If it is written properly, you can save a ton of taxes.
You can go to IRS.gov and type IR-2011-39 in the little search window. Read the Dirty Dozen and note that under abusive retirement plans the LLC IRA combination is subtly listed. Being on the list means it is on the top 12 list of IRS abuses. No, it doesn’t directly use the words “checkbook IRA,” but that is what the reference is about. It hasn’t made the list since 2011, but the IRS has still got LLC IRA abuses on their radar.
Self-Directed IRA Custodians Should Be Qualified
One other issue I am seeing quite a bit of today is folks signing on with self directed IRA custodians that are really not IRS qualified. The whole concept of an IRA is an account that is controlled by a custodian that the IRS has qualified and approved.
One of the big self directed IRA custodians started franchising offices about 10 years ago. They recruited quite a few franchisees and had a big operation going within a couple of years. Everything went along fine until the IRS figured out that each of the franchisees was managing their accounts independent of the franchisor.
The franchisor was an IRS qualified self-directed IRA custodian, but since they didn’t actually manage the IRA accounts of each franchisee’s clients, the accounts were not being managed properly. The individual franchisees weren’t considered a qualified self-directed IRA custodian, so the IRAs were in danger of being disallowed.
The IRS came in and shut all of the operation down. Most of the IRA “owners” didn’t really know what happened. They just knew that things changed. Some of the franchisees went through the steps of getting individually approved by the IRS as custodians, and some just collapsed. The IRS was nice and didn’t go directly after the IRA owners.
IRS Cracking Down on Checkbook IRAs with Self-Directed IRA Custodians
Since the IRS has doubled the number of agents in the past couple of years, they have lost their warm and fuzzy side and are leaner and meaner than ever. The next round probably won’t leave the individual IRA owners free from scars.
A number of my students have asked me about specific self directed IRA custodians. One that I have investigated is acting as a custodian, but they aren’t really an IRS approved self-directed IRA custodian. They have associated with a bank that is fronting as the IRS approved custodian. It looks a lot like the franchisee problem under a different name.
The penalty for placing an IRA in the hands of a non qualified person is the loss of the IRA, if the IRS decides to come after the individual accounts.
I recommend you do some homework when you choose a self directed IRA custodian. Don’t be afraid to ask questions and get exact answers. I have my accounts with Equity Trust Company, which is one of the oldest and probably the largest self-directed IRA custodian. I admit they are frustrating to work with, because they cross all the t’s and dot all the i’s, but I’m not interested in IRS problems because I choose poorly when I picked a self-directed IRA custodian.
By Lee Phillips