The Self-Directed IRA custodian is one of the most important things to consider when starting a plan. Not all custodians are the same! A lot depends on what account owners want to invest in, how hands-on they want to be, and how much they want to spend. Different custodians offer different services. Further, the fee structures also vary based on the type of Self-Directed IRA you choose.
What Does a Self-Directed IRA Custodian Do?
IRA custodians hold and manage your IRA funds to ensure compliance with IRS rules; they do not provide financial advice – investors must conduct their own due diligence.
How to Choose the Right Custodian?
- Are they a member of RITA? (Retirement Industry Trust Association)
- Do they allow Checkbook Control for faster investing?
- Do they specialize in alternative investments?
- Is their fee structure transparent and fair?
- Do they push investment products or let you decide?
Understanding Self-Directed IRAs
A Self-Directed IRA (SDIRA) is a type of individual retirement account (IRA) that allows the account owner to invest in a broader array of assets compared to traditional IRAs. SDIRAs are designed for savvy investors who want to diversify their retirement portfolio with alternative investments, such as real estate, precious metals, and private placements. With a Self-Directed IRA, the account owner has direct control over the investments and can make decisions on how to manage the account.
SDIRAs are available as either traditional or Roth IRAs, and they offer the same tax benefits as “regular” IRAs. However, SDIRAs require greater initiative and due diligence by the account owner, as they are responsible for managing the investments and ensuring compliance with IRS rules.
What is an IRA Custodian?
By law and pursuant to Internal Revenue Code (IRC) Section 408, you must set up an IRA at a bank or other financial institution, or authorized, state-regulated trust company. The IRA trustee, or custodian, is the company that administers the plan. They are essential to maintain the tax advantages of the plan. Traditional plan assets are tax-deferred, meaning you don’t pay taxes until you withdraw funds. Roth plans are funded with after-tax money and all investments grow tax free.
The custodian holds the account’s investments for safekeeping. Further, they ensure the plan follows all rules set forth by the government, in particular, the Internal Revenue Service (IRS). Failure to adhere to these rules may lead to the disqualification of the IRA. If that happens, you lose all the benefits of investing with an IRA.
Why Do You Need a Special Custodian?
As we mentioned, not all Self-Directed IRA custodians are the same. You can go to virtually any bank or financial institution to open a Self-Directed IRA. However, most “big box” custodians will limit what you can invest in. Many only allow for traditional investments, such as stocks and mutual funds. Therefore, you will need a special custodian, such as IRA Financial, if you want to invest in non-traditional assets, also called alternative assets. These include real estate, precious metals, cryptocurrencies and hard money loans.
Traditional institutions don’t make money when you buy alternatives. They make their money by selling you traditional investment products or by holding onto your cash. On the other hand, Self-Directed IRA custodians make their money by simply setting up the plan for you, and by administration fees.
Generally, a Self-Directed IRA custodian will not try to sell you a product. Further, they do not provide investment advice. Essentially, they maintain the plan for you and give you the freedom to invest in whatever you see fit. Of course, you should always consult with a financial advisor to make sure your investments fit your personal goals.
Custodian Fees and Services
When selecting a Self-Directed IRA custodian, it’s essential to consider the fees and services offered. Custodian fees can vary widely, and some custodians may charge higher fees for certain services. Here are some common fees associated with self-directed IRAs:
- Setup fees: These fees are charged when opening a new Self-Directed IRA account.
- Annual fees: These fees are charged annually to maintain the account.
- Transaction fees: These fees are charged for each transaction, such as buying or selling an investment.
- Maintenance fees: These fees are charged for ongoing account maintenance.
When evaluating custodian fees, it’s crucial to consider the services offered. Some custodians may provide additional services, such as investment advice or account management, which may be included in the fees. Others may charge extra for these services.
Risks and Challenges of Self-Directed IRAs
While Self-Directed IRAs offer the potential for higher returns and greater diversification, they also come with unique risks and challenges. Here are some of the key risks and challenges to consider:
- Investment risk: Self-directed IRAs allow investors to invest in alternative assets, which can be riskier than traditional investments.
- Lack of liquidity: Some alternative investments, such as real estate or private placements, may not be easily liquidated.
- Regulatory risk: Self-Directed IRAs are subject to IRS rules and regulations, and non-compliance can result in penalties and fines.
- Fraud risk: Self-Directed IRAs can be vulnerable to fraudulent schemes, such as Ponzi schemes or investment scams.
To mitigate these risks, it’s essential to work with a reputable custodian and to conduct thorough due diligence on any investment. Additionally, investors should carefully review the fees and services associated with the custodian and ensure that they understand the risks and challenges associated with Self-Directed IRAs.
Choosing the Best Self-Directed IRA Custodian
Choosing your custodian involves many factors. The first question an IRA owner should ask is if they are a member of the Retirement Industry Trust Association (RITA). RITA is the organization that is responsible for the continuing education of all regulated Self-Directed IRA custodians. The best of the best custodians are members of RITA.
Next, you want to ensure they know what they are doing! Expertise in all matters of self-directed plans is imperative, especially checkbook control. Checkbook control gives you, the investor, the freedom to make any IRS-approved investment anytime you want! Alternatively, custodian control will allow you to make alternative investments, however, you have to get your custodian’s consent before investing. This can cause needless delays. Obviously, your custodian should be well versed on all IRS rules concerning IRAs.
Lastly, you should know the fee structure of the custodian you choose. Here at IRA Financial, we feel you should never pay asset valuation fees. You should not have to pay more because of successful investments. There should only be one, flat fee you need to pay to maintain the plan, no matter the account balance. Lastly, there shouldn’t be a minimum balance requirement. Everyone is entitled to make the most out of his or her retirement savings. Self-directed plans are not just for the wealthy!
Frequently Asked Questions
Why Do You Need a Specialized Custodian?
Banks and big financial firms limit investments to stocks and mutual funds.
Specialized custodians allow real estate, private equity, and other alternative assets. They charge fees for account setup and maintenance, rather than selling financial products.
What Custodian Fees Should I Watch For?
Setup Fees – Charged when opening the account.
Annual Fees – Ongoing account maintenance costs.
Transaction Fees – Costs for buying and selling investments.
Hidden Fees – Some custodians charge based on account value – flat fees are usually better.
What Are the Risks & Challenges of Self-Directed IRAs?
Investment Risk – Some alternative assets can be volatile.
Liquidity Issues – Real estate and private placements may be harder to sell.
Regulatory Compliance – Breaking IRS rules can result in penalties.
Fraud Potential – Investors must vet investment opportunities carefully.
Putting it All Together
Choosing a Self-Directed IRA custodian should not be taken lightly. You do not want to randomly choose one based on little information. The cost for setting up the account will vary greatly. Just because one is cheaper (or more expensive) does not tell you anything about their service, expertise and experience. Do your homework before signing up.
Finding the right answers to these questions are critical in choosing the best Self-Directed IRA custodian. Work with a qualified financial planner, do you research, and educate yourself before choosing a custodian. If you have any questions, feel free to contact us at 800.472.1043. We’re here to answer any questions you may have!
