Checkbook Control vs. Direct Custody: Which Self-Directed IRA Structure is Right for You?

Investing with a Self-Directed IRA (SDIRA) gives you the flexibility to grow your retirement funds by tapping into a wide range of alternative assets like real estate, private equity, cryptocurrencies, and more. But how you manage your SDIRA is just as important as where you invest. At Rocket Dollar, we offer two popular structures for self-directed IRAs: Checkbook Control and Direct Custody. Each structure has its own benefits and considerations, and choosing the right one can impact your investing experience.

Let’s dive into the differences between Checkbook Control and Direct Custody, and explore which option might be best for you.

What is a Self-Directed IRA?

A Self-Directed IRA is a powerful tool that allows investors to diversify their retirement portfolios beyond traditional stocks and bonds. With an SDIRA, you have the flexibility to invest in alternative assets like real estate, private loans, precious metals, and even startups. The key to unlocking this flexibility is how you manage your account, and that’s where Rocket Dollar’s Checkbook Control and Direct Custody IRAs come into play.

What is a Checkbook Control IRA?

With a Checkbook Control IRA, the investor establishes a special trust account or LLC, which is owned by the IRA. The IRA funds are invested into this Trust or LLC, and the investor becomes the manager. This setup gives the investor direct control over the bank account associated with the trust or LLC, allowing them to write checks or transfer funds whenever an investment opportunity arises. No need to wait for custodian approval—just take action when you’re ready.

Pros of Checkbook Control IRA:

Immediate control: You can access your funds instantly, enabling you to jump on investment opportunities quickly—crucial for time-sensitive deals like real estate auctions or cryptocurrency trades.

Fewer custodian fees: Because most transactions happen directly through your account, you won’t pay custodian fees for every single investment.

Ideal for active investors: If you frequently make investments or need the flexibility to execute deals on short notice, Checkbook Control gives you the autonomy you need.

Cons of Checkbook Control IRA:

More responsibility: Managing this account comes with added administrative work, like filing annual reports and ensuring compliance with IRS rules. However, Rocket Dollar helps make this process much smoother by assisting with setup and providing ongoing guidance to reduce the burden of managing the legal and administrative tasks.

Risk of prohibited transactions: You must be cautious to avoid making prohibited transactions (such as buying a vacation home for personal use), which could disqualify your IRA. Again, Rocket Dollar provides resources and support to help you navigate these rules, but the ultimate responsibility lies with the investor.

What is a Direct Custody IRA?

In contrast, a Direct Custody IRA means a custodian holds your assets directly as the custodian. You don’t need to form or manage a trust or LLC, and Rocket Dollar handles the administrative side, executing your transactions upon request. This structure provides a more hands-off experience, allowing you to focus on your investments while Rocket Dollar takes care of the paperwork and compliance.

Pros of Direct Custody IRA:

Simplified setup: There’s no need to establish or maintain a trust or LLC. Rocket Dollar handles the custodial work, making it easier for those who prefer a more streamlined approach.

Perfect for passive investors: If you don’t make frequent investments or don’t need quick access to funds, Direct Custody is a hassle-free way to manage your retirement assets.

Less responsibility: Since Rocket Dollar handles much of the administrative work, you can focus more on your investments and less on compliance or legalities. Rocket Dollar’s team ensures that your transactions adhere to IRS regulations.

Cons of Direct Custody IRA:

Slower transaction times:

Because your custodian must approve each transaction, you may experience delays when making investments. While Rocket Dollar works hard to ensure transactions are processed promptly, this structure is naturally slower than the instant access Checkbook Control offers.

Potential for transaction fees: If you frequently make investments, the transaction fees in a Direct Custody IRA could add up. However, if you make fewer, larger investments, these fees are likely manageable and often worth the tradeoff for the convenience of custodian oversight.

Which Self-Directed IRA Structure is Right for You?

Checkbook Control Might Be Right for You If:

• You’re an active investor who needs quick access to funds to seize investment opportunities on short notice.
• You’re comfortable with managing a trust or LLC and handling some additional administrative tasks (with help from Rocket Dollar).
• Your investment strategy involves time-sensitive assets like real estate, tax liens, or crypto trades that require fast action.

Direct Custody Might Be Right for You If:

• You’re a passive investor who doesn’t mind a slightly slower process, as long as Rocket Dollar handles most of the paperwork.
• You want a simple, hands-off approach and are more interested in long-term investments where transaction speed isn’t critical.
• You’re investing in assets that don’t require frequent transactions, such as private equity or long-term real estate deals.