Even thought there are several versions of the checkbook IRA concept,  they all follow a basic pattern. First, your IRA money is moved from your bank or broker to the self directed IRA trustee. This is a non taxable transfer made between trustees.

Second, the IRA owner establishes an entity. An LLC is usually the preferred entity, because it is a 'pass through entity' for tax purposes. Stock in the corporation or a membership interest in the LLC is then sold to the IRA.  It is perfectly legal for an IRA to buy stock in a corporation or even membership interests in an LLC.

Third, the IRA owner is made the manager of the LLC. As manager of the LLC, the owner then controls all the funds of the LLC. The funds received from the IRA in exchange for ownership of the LLC are simply deposited into the LLC's checking account. Once in the company's checking account, the manager can spend the money anyway he or she deems appropriate. Thus, they have 'checkbook authority' over the IRA funds.

Checkbook control promoters advertise that you can access your IRA money at any time without a penalty.  This is big, right?

Well not according to Jeff Desich, CEO of Equity Trust Company, one of the nations leading IRA providers.  Desich says: 'The government, specifically the IRS and DOL have weighed in on the checkbook control concept, and they don't like the concepts. He'll refer you to 'Retirement News for Employers - Fall 2010 Edition,' where you can get an official statement by the IRS.'

'We are on the side of the government on this issue and share their concerns. Which has led us to not to allow checkbook control investments at Equity Trust,' states Desich. 

Clark Gardner, CPA, asks the question: 'Do you really think the IRS is going to let you spend your IRA money any way you want before retirement age without any taxes or penalties?'

You should be able to invest in real estate directly with your IRA.  Many checkbook IRA structures are used to purchase real estate.  The promoters of the checkbook IRA sell the concept as a way to circumvent the independent IRA trustee.  If the IRA trustee isn't in the loop, there aren't any of the trustee fees and the deal can be done without any trustee interference.

Equity Trust and a few other IRA custodians do not allow checkbook control investments; because they feel that the checkbook control IRA structures will ultimately be officially declared illegal by the IRS.

You can go to IRS.gov and in the IRS search box type in 'dirty dozen.'  The top 12 tax shams the IRS is targeting this year will be displayed.  Note that the IRA LLC combination is on the top 12 list.

Establishing a checkbook IRA structure is definitely a case of "buyer beware".