With a Self-Directed IRA (SDIRA), investors have complete control over where to invest their money in alternative asset classes. It is important to have a knowledgeable and trustworthy custodian for your account and IRA investment to be successful.
A custodian who is not self-directed allows IRA holders to engage in non-traditional investments and never offers investment advice or sells investment products. The custodian of a Self-Directed IRA earns their income from managing and overseeing investments that are approved by the IRS and owned by an IRA or other retirement plan.
An IRA can be established by opening an account at a bank, financial institution, or authorized trust company, such as IRA Financial Trust. The IRA custodian is responsible for maintaining and administering the IRA. The IRA custodian is responsible for ensuring that all IRS reporting requirements regarding the IRA are met. This includes filing IRS Forms 5498 and 1099-R.
Different IRA custodians have different fiduciary responsibilities. The fiduciary responsibility of an IRA custodian varies depending on the institution, but most have at least a “best interest” responsibility.
IRA investors who want to invest in alternatives like real estate cannot get investment advice from their IRA custodian because they are not fiduciaries. The self-directed IRA custodian’s main job is to carry out transactions that the IRA holder tells them to, as well as look after any alternative investments that the IRA owns.
Although the Self-Directed IRA custodian is not responsible for reviewing the transaction, they are still required to perform due diligence. Hence the name “Self-Directed.”
The Most Important Questions to Ask an IRA Custodian
- Are you a custodian or an administrator? As we just touched upon, there’s a difference between a Self-Directed IRA custodian and administrator. Your IRA must be held with a custodian. However, an IRA administrator will work with a custodian as well. For example, before IRA Financial partner Adam Bergman started the IRA Financial Trust Company, IRA Financial Group acted as an administrator with ties to several custodian options for clients to choose from. So long as you have a good administrator, you should be well covered.
- What types of investments can I make? If you are looking into opening a Self-Directed IRA, you probably want to invest in alternative assets, such as real estate, tax liens and precious metals. The IRS allows for alternative investments, however, not all IRA custodians do. Many Self-Directed IRA Custodians only allow you to invest in precious metals or cryptocurrencies. With IRAFT, you are not limited in what you are allowed to invest in.
- What fees do you charge for your services and how are they charged? Different companies offer different fee schedules. Fees can vary based on account value, the number of transactions and the specific services you need. For example, IRA Financial Trust charges one flat, annual fee, due at set-up and then billed quarterly each subsequent year. Checkout IRAFT’s fee schedule here.
- Do I need permission to make an investment? Generally, there are two types of SDIRAs: Custodian Control and Checkbook Control. With a custodian controlled IRA, you need to get permission to make an investment. This takes time and may come with transaction fees. When you have “checkbook control” of your Self Directed IRA, you can make an investment without custodian consent. You simply write a check or wire funds directly from your SDIRA LLC account. There is no delay or transaction fees.
- What types of accounts do you offer? Most IRA custodians and administrators offer traditional, as well as Roth IRA plans. However, you might be interested in another type of account. Self-Employed individuals might seek a Solo 401(k), small business owners may want a SEP or SIMPLE IRA. Other options include Health Savings Accounts, Coverdells and ESOPs. Make sure the custodian you are interested in offers the plan(s) you need.
- Tell me about your company. I know this is not a direct question, but you should know as much as you can about your custodian. These are some questions you should ask the company before entrusting them with your money: How long have you been in business? How many clients do you have? How much are the assets in which you control worth? How many employees do you have (i.e. will my needs be met in a timely manner)? How is your customer service? Are you BBB accredited? Are you regulated (and by whom)? Any information you can garner about the custodian will help you make a more informed decision.
- Do you provide educational materials? Self-Directed IRA custodians do not offer financial advice. However, it’s important they do provide educational materials to help you better understand the product, the process and the rules. These may include an informative website (including a blog), podcasts and videos, an app or webinars. The more information you can garner, the more informed you will be about the entire process.
- What is your coverage area? Since the start of the Internet, there’s no longer a need to do everything face-to-face. Nowadays, you don’t even need to be in the same state or country. However, certain IRA custodians might have a small geographical area that they cover. This may be an issue for you, particularly if you are a real estate investor. IRA Financial Group offers their services world-wide. You can invest right in town, or around the globe.
- Do you have references or testimonials? Lastly, it’s of vital importance to know just how experienced your Self Directed IRA custodian is. How do current clients rate their experiences? Is customer service friendly and efficient? Do you have a referral program? Were there any complaints filed against the company or an employee? These are all important questions to consider when signing up for a long term financial commitment.
A Self-Directed IRA Custodian Has Less Responsibility
The Self-Directed IRA custodian is not treated as a fiduciary by the U.S. The SEC does not get involved in investments or advise people on what to do with their money. Its only responsibility is to help with investments in things other than what is not allowed, based only on what the IRA holder says.
This means that there is a growing demand from retirement account holders to make investments in things like real estate, hedge funds, and private equity, which traditional financial institutions are not providing for.
The retirement custodian will invest in alternative assets on behalf of the IRA owner and also provide custody services. This means that a Self-Directed IRA custodian cannot tell you what investments to make or what strategy to use.
Responsibilities of the Self-Directed IRA Custodian
The custodian of a Self-Directed IRA is responsible for filing IRS Form 5498 and 1099-R, as well as any other IRS reporting related to the IRA. The Self-Directed IRA custodian will also take care of paying expenses related to the IRA transaction, such as property taxes on a real estate investment.
The Difference Between a Custodian and an Administrator
You can only invest in an IRA if your account is opened at a qualified custodian who will manage the account. The government imposes strict banking regulations that banks must follow. The rules are designed to protect you and the money you have with the custodian. If you do not have a qualified custodian, you may have to pay taxes or your IRA could be disqualified.
A Custodian should not be confused with an Administrator. An IRA administrator manages the account and takes care of all the details. These services can include tax reporting, generating quarterly statements, processing documents, and helping to ensure compliance with IRS regulations. An administrator is required for a Self Directed IRA since the account holder is not legally allowed to perform investment duties themselves. Oftentimes, administrators are not bound by banking laws. A contract binds you to the terms set forth in the agreement.
Lastly, a qualified custodian may also offer administration services. IRAFG helps people to set up Self Directed IRAs and also manages them. IRA Financial Trust is a qualified custodian and an administrator.
Open a Self-Directed IRA with a Self-Directed IRA Custodian
You need to open a Self-Directed IRA with a custodian that specializes in alternative asset investments, such as real estate.
The self-directed retirement industry emerged to address the need for retirement investors to be able to use their retirement funds to make alternative investments approved by the IRS. The reason for this is that not all IRA custodians allow their clients to make investments that are not traditional stocks or bonds. Many banks and financial institutions that custiodian IRAs do not allow their clients to use IRA funds for alternative asset investments because the banks do not make any money from those investments.
The IRS approves of certain investments for IRAs, but it is up to the custodian to decide which ones will be available to their clients. This means that banks do not make much money from allowing their clients to invest in real estate.
Top 3 Things Investors Hate About Their Previous Self-Directed IRA Company
#1 Lack of Industry Knowledge
The most common complaint from clients is that service providers lack industry knowledge. This shocking revelation can feel like fraud, or actually be fraud, and there is a real cost to it. Client complaints about custodians whose staff lack expertise are common. If a custodian makes a mistake with an IRA account, the account holder has to pay a fee to the IRS.
Since there is always the potential for mistakes to be made, it is a risk that comes along with having a self-directed IRA. Sometimes they can be corrected. The key point is that people who have an SDIRA account need to have a custodian who will know what mistakes you made so they can be corrected. If you’re not aware that you’ve made a mistake, how can you fix it?
It matters because investors can lose all tax advantages or suffer from costs that were meant to build up a retirement plan if a financial institution’s staff lacks knowledge in the following areas:
- Processing IRA investment
- Retirement account investing rules
- Alternative investment(s) not allowed in their state
- Identifying a prohibited transaction and a disqualified person
- Real estate investing process and rules
- Self directed Roth IRA vs Traditional IRA rules
- Required minimum distributions (RMD)
- Contribution limits
#2 Phone Trees Without Response
“It’s nice to not have to wade through a computerized phone system or be put on hold by clericals that don’t know what you’re talking about; experiences we were glad to leave behind with our previous IRA custodians.”
We found this post on Facebook and thought it perfectly supports complaint #1- Honestly, who likes to be put on eternal hold or never get a response? You could clearly hear the frustration of this client. It makes sense to talk to a human investor to make sure all your questions are answered. The company holds your money for retirement- you should be able to speak to a live person when needed.
It’s sad and all too common to have the experience, as a customer, of constantly being promised that your satisfaction is a priority, only to find that it seems to be the opposite. We’ve all been there- being transferred to different people and departments when we call customer service, and being disconnected before our issue is resolved.
#3 Fees and Invoices
Openness and honesty are important when it comes to billing and costs. Custodians of self-directed IRAs are sometimes not forthcoming about how they charge fees.
Do you know how much you are paying in fees for your bank account? You should be aware of what fees you are paying, and how much they are. You should be aware of when funds leave your account and have a clear understanding of the reasons why. If you’re having trouble understanding your transactions or if they sound too complicated, be careful.
Custodians should be clear about when and how they charge fees. The small print on how these are handled usually includes fees for the administration of the retirement account and transaction fees for the investment (buy, sell, wire, etc.). It is important to know what you are agreeing to pay beforehand.
Self-Directed IRA Custodian FAQs
Do You Need a Custodian for a Self-Directed IRA?
Yes. A custodian is required to have any type of IRA. Although custodians are regulated by government entities, there are other companies like administrators and providers that are not regulated in the same way.
How Do I Choose a Self-Directed IRA Custodian?
If you want to find the best custodian for your self-directed IRA, it’s important to do your research. Compare companies based on your investment of choice. Focus means to center one’s attention on someone or something. In this context, it means that custodians may managing certain type of investments. Before choosing and investing in a custodian, compare their fee structures.