Self-Directed IRA Fees - ExpoIRA Blog

Understanding Self-Directed IRA fees can be challenging due to their diverse forms. Various types of Self-Directed IRA platforms exist, each with its distinct fees. Moreover, even when comparing the same platforms, the fee structures can significantly vary. In order to compare plans effectively, let’s analyze the potential fees in a Self-Directed IRA and what factors you should consider.

It should be noted that there is no such thing as a Self-Directed IRA without fees. However, the specific fee structure of a Self-Directed IRA can vary based on its type. Certain companies may impose a higher setup fee, whereas others may charge a percentage based on the value of assets. To gain a clearer understanding of the fees associated with Self-Directed IRAs, it is important to familiarize oneself with the different types of accounts.

Self-Directed IRA: This is a custodian-centric account for which all transactions are executed by the custodian.
Self-Directed IRA LLC: This is a retirement account that allows investors to perform transactions without going through a custodian.

You will come across some common fees for Self-Directed IRAs, such as:

Setup Fee: A one-time fee that covers the establishment of the Self-Directed IRA by the custodian

Transaction Fees: Fees the custodian charges for performing transactions on behalf of the account holder
Asset-Based Fee: A quarterly or annual fee that is charged based on the total value of assets that are being held by the Self-Directed IRA
LLC State Fee: If you’re investing with a Self-Directed IRA LLC, depending on the state, you may be charged an annual LLC State Fee
Annual Account Fee: Fee charged by the custodian for maintaining the IRA

Asset Purchasing Fees: When a Self-Directed IRA company also provides the asset being invested in, there will often be an increased markup on the purchase price.
Asset Holding Fees: Assets like gold are charged a storage fee by the depository and that fee is usually passed along to the account holder

Let’s now discover the fees that may be applied to your account type, considering that we have knowledge of the fundamental types of Self-Directed IRA accounts and the standard fees.

A Self-Directed IRA will typically charge a low setup fee, transaction fees, and then either a flat quarterly fee or an asset-based fee.
A Self-Directed IRA LLC will charge a more substantial setup fee, a variable LLC State Fee, but no transaction or asset-based fees.

When considering Self Directed IRA investing, every investor wants to find the most cost-effective fees and the best account functionality. However, selecting a fee structure is not always a simple decision due to the unique nature of this type of investing. This is because the fees can differ not only based on the company but also based on two additional factors.

The type of asset that is chosen for investment
The management structure of the chosen asset

Let’s now discuss some of the most popular assets for a Self Directed IRA and decide on the ideal fee structure for each one.

Real estate in a private placement – A Custodial Self Directed IRA is usually the best choice as it has a low setup fee and you won’t be paying many transaction fees because the property is within a private placement. Just be careful to choose a Self Directed IRA Custodian that doesn’t charge asset based fees. Real estate values can be quite high and you don’t want to be stuck paying more because you’re successful.

Real estate with direct management – If you choose to purchase a property and manage it independently, then an IRA LLC (or any other platform which offers checkbook control) would be the best fit. This is because real estate management is often transaction heavy and you want to choose a platform that doesn’t charge transaction fees. With an IRA LLC, the transactions occur within the dedicated checking account so there is naturally no Custodian executed transactions. Investors may pay more for the initial setup, but the savings in transaction and asset based fees will almost always come out to be substantial.
Startups or crowdfunded ventures – Here it depends on your involvement with the investment. Will you be investing in the style of a private placement, I.e. you write the check but a third-party company will handle all the management? Or is it a company that you perform managerial duties for and you will be funding it with your IRA? Most of these kinds of investments fall under the first category (private placement) and thus would be best served by a low priced Custodial Self Directed IRA.

If you deduct specific expenses under “miscellaneous itemized deductions,” you can deduct the tax-deductible payment of IRA custodian fees. However, this is only applicable when the Self-Directed IRA fees were paid using personal funds rather than from the IRA account.

A Guide to Self-Directed IRAs

A self-directed IRA gives investors the opportunity to hold a wide range of unique investment options within a retirement account. In comparison to traditional IRAs or Roth IRAs that frequently consist of stocks and bonds, a self-directed IRA offers a more extensive array of investment choices. According to Cassandra Kirby, a partner and wealth advisor at Braun-Bostich & Associates in Pittsburgh, the individual who manages the account is the account owner, and therefore they bear the responsibility of conducting thorough research and continuously managing the underlying assets. To open and handle a self-directed IRA, one should possess sufficient knowledge in investing and be aware of the associated risks with the underlying investments.

What Is a Self-Directed IRA?

A self-directed IRA shares similarities with traditional and Roth IRAs in various respects. It aims to offer tax benefits and necessitates adherence to identical eligibility criteria and contribution restrictions. The 2022 maximum contribution is $6,000, but if you are 50 years or older, it increases to $7,000. Withdrawals without penalties can be initiated at the age of 59 1/2.

The distinction lies in the variety of investments that can be held in the account. While a traditional or Roth IRA can be utilized for investing in CDs or mutual funds, a self-directed IRA allows for investment in a broader range of alternatives.

Some potential uses for funds within a self-directed IRA include:

Real estate.
Undeveloped or raw land.
Promissory notes.
Tax lien certificates.
Gold, silver and other precious metals.
Cryptocurrency.
Water rights.
Mineral rights, oil and gas.
LLC membership interest.
Livestock.

How to Open a Self-Directed IRA

According to Brian Stivers, president and founder of Stivers Financial Services in Knoxville, Tennessee, a self-directed IRA is not a plan that can be managed entirely by oneself. The utilization of a third party, commonly known as a custodian or trustee, is necessary for self-directed IRAs.

To initiate the process of opening a self-directed IRA, you can follow these sequential steps:

Find a custodian or trustee for the account.
Select the investments you would like to make.
Carry out any due diligence needed for the investment.
Find a broker to purchase the investment.
Ask the custodian or trustee of the account to carry out the desired transaction.

Not all institutions that offer other types of IRAs also provide custodian services for self-directed IRAs. Some organizations, such as The Entrust Group, Equity Trust, Madison Trust, Millennium Trust Company, Pacific Premier Trust, and IRA Financial, offer custodianship for self-directed IRAs. The establishment and monitoring of IRA funds usually entail fees. It is important to note that every transaction requires a process, and self-directed IRAs are commonly used for long-term investments. According to Chris Kampitsis, a certified financial planner for Barnum Financial Group in Elmsford, New York, investors should be aware that these types of investments tend to have lower liquidity and cannot be easily entered or exited with a simple mouse click during a trading day.

Advantages of Self-Directed IRAs

A self-directed IRA offers various advantages that can enhance your retirement savings, making it an appealing option for investment. These key perks include:

Greater flexibility in the investments you’re able to hold in the account.
Built-in tax breaks on the earnings from your investments.
The opportunity to make investments that line up with your passions, knowledge or experience.
The chance to diversify funds by keeping some money in a self-directed IRA and other funds in traditional investment accounts or other retirement accounts.
The option of selecting investments that may have higher potential for appreciation.

Disadvantages of Self-Directed IRAs

Even if you conduct extensive research on an asset before investing in it through a self-directed IRA, there are still high risks involved. Some of the primary drawbacks of self-directed IRAs are as follows:

You can’t invest in collectibles, life insurance or real estate you live in.
The investments tend to have higher risk.
The account maintenance fees can be relatively high.
The record keeping and tax reporting requirements are complex.
The IRS prohibits various types of transactions.
You’ll have to pay penalties or taxes if certain IRS guidelines aren’t followed.

Traditional Versus Roth Self-Directed IRA

When establishing a self-directed IRA, you have the choice between a traditional or Roth account. Both options provide tax benefits, but there are notable distinctions. With a traditional self-directed IRA, you may be eligible for a tax deduction on your contributions. In contrast, when you withdraw funds at a later date, the distributions will typically be subject to ordinary income tax. On the other hand, if you select a Roth self-directed IRA, the contributions you make are not eligible for tax deductions. However, when you withdraw funds in the future, the distributions will be exempt from taxes.