Learn How To Choose a Self Directed IRA Custodian

For many individuals, investing in alternative investments within a retirement account (such as IRA, Roth IRA, SEP IRA, SIMPLE IRA, or 401k) is a novel endeavor. It is highly probable that those who have previously purchased traditional investments (such as stocks, bonds, or mutual funds) have already availed the services of a custodian for these investments. While investors often use the term “brokerage firms” to refer to traditional custodians, it is essential to recognize the distinction between the two definitions.

Brokerage firm – more accurately known as a broker-dealer , is a firm which is in the business of either buying or selling securities for its clients (broker) or buying or selling securities for itself (dealer). This means it makes its revenues from transacting securities for clients, or the trading securities for itself.
Custodian – an institution which is responsible for records management and safekeeping of the assets within the client accounts. This type of firm typically generates revenues from its custody duties.

Although there is a clear distinction between a custodian and a brokerage firm, it is common for a firm to have control over both and present them as a single entity. This is frequently seen with larger brokerage firms, which can be confusing for clients who may not have access to comprehensive education on the matter. Therefore, when considering working with such firms, it is crucial to fully comprehend the services they offer. It is preferable to choose a firm that specializes in a specific area, as this provides clarity on the risks, roles, and responsibilities associated with the firm.

Learn How to Choose a Self Directed IRA Custodian

Selecting a self-directed IRA custodian holds a significant weight as it can influence your investments, management time, and performance. It is crucial to thoroughly investigate various self-directed IRA custodians to ensure their suitability and compliance with IRS regulations as legitimate IRA custodians.

When choosing a self-directed IRA custodian, it is crucial to consider several factors, and here are the more significant ones.

Specialization: While some IRA custodians specialize in traditional investments (stocks, bonds, and mutual funds), other IRA custodians (“self-directed”) specialize in alternative investments (real estate, private mortgages, tax liens, livestock, physical gold and silver, private company stock, or other non-traded security). There are even a few IRA custodians who will attempt to custody both types of investments. An IRA custodian who specializes in traditional investments, typically will not be the best one to also custody your alternative investments. The reverse holds true as well. When you work with a self-directed IRA custodian, you want to work with one whose specialty matches up with your needs. We have thoroughly reviewed almost all of the self-directed IRA custodians and while it is possible that one exists who is capable of handling both asset types well, we have not found one yet. It is important to know the strengths of your IRA custodian and to utilize them for those strengths.
Fees: Every IRA custodian charges a fee for their services. In general, there are two models that are followed by self-directed IRA custodians, either a transaction fee model or an asset-based fee model. Make sure the custodian’s fee schedule aligns with your investment strategy. Your choice of self-directed IRA custodian is important because it will impact the total returns of your self-directed IRA. While some fees are negotiable, it typically only applies to larger accounts.
Number of Transactions: Your investment strategy might be to buy one asset and hold it for 10 years or it might be to buy and sell assets 20-30 times in a week. Your IRA performance can be significantly impaired if the transaction expectations are not assessed properly and accounted for in the self-directed IRA custodian decision-making process. Automated services and a quick turnaround time at the self-directed IRA custodian are also important. If the IRA custodian is not prepared to properly handle multiple transactions in a timely manner, then it could affect your IRA investments. Some custodians offer services which can provide automation for repetitive transactions, or scheduled transaction activity. You should make sure your IRA custodian understands and is prepared to handle your transaction needs.
Miscellaneous Fees: While this factor is important when using any IRA custodian, it is typically more relevant for self-directed IRA custodians. Many alternative investments require these services as part of the investment strategy, and almost all of the IRA custodians charge fees for these miscellaneous services. These services include activities such as: Fed Funds wires, notarizing documents, document storage, account setup fees, statement fees, transfer fees, account termination fees, and servicing fees such as check writing, processing documents, etc. Some custodians include these services in their custody fees, others itemize the fees and charge them separately. It is helpful to understand why the miscellaneous fees are being charged by the self-directed IRA custodian. The miscellaneous fees can be either pass-through or revenue generators for the self-directed IRA custodian. The pass-through fees are fees incurred by the custodian which they then pass along to the IRA account (for example fed funds wires, or postage). Revenue generator fees are a way for the IRA custodian to generate revenues for their services (for example notarizing documents, document storage fees, or account termination fees). Regardless of the reason for charging the fees, the bottom line is that all fees affect the portfolio’s net performance. Make sure the expected return on your investment takes into account all these miscellaneous fees.
Service: This qualitative metric is one of the most overlooked areas in the due diligence process. This is a “wisdom through experience” process. Service is made up of important components such as: custodian depth of knowledge, timeliness of response, precision, consistency of a process, quick resolution to an issue, and willingness to adapt to an ever-changing environment. Self-directed IRA custodians require a high level of service due to the documentation requirements. For example, investing in a piece of real estate inside an IRA at a self-directed IRA custodian requires the custodian to process all documentation associated with the property (e.g. paying taxes, expenses, insurance, maintenance personnel, or other expenses). If the service team at the custodian is not very experienced in this type of transaction, or are slow in their response time, or are sloppy with their documentation processing, the investment could be negatively impacted. It is very important that this process is highly efficient.

BONUS: Why the Self-Directed RA LLC Means you Don’t have to Pay IRA Custodian Fees

A Self-Directed IRA LLC is a tax structure approved by the IRS, which permits you to oversee your retirement account personally, without the requirement of paying a custodian. Furthermore, it provides additional advantages, including convenient accessibility and tax-free earnings.

SELF-DIRECTED IRA LLCS VS. TRADITIONAL IRAS

By having a Self-Directed IRA LLC, you gain the power to oversee your retirement funds and invest in any choice of your liking, excluding collectibles like art. The noteworthy advantage is that you no longer need to seek approval from a custodian or bear any custodian fees.

When using your retirement funds to make investments with a traditional IRA, it is necessary to involve a custodian, resulting in the occurrence of high custodian fees and transaction delays most of the time.

By establishing a Self-Directed IRA LLC, you create a limited liability company (“LLC”) with a specific purpose, which is owned by your IRA and can be managed by you or a third party. As the manager of the IRA LLC, you will possess complete control over the assets in your IRA and have the freedom to invest in whichever investments you prefer and comprehend, rather than being restricted to investments imposed by Wall Street.

A SELF-DIRECTED IRA LLC GIVES YOU CONTROL OF YOUR RETIREMENT

By using a Self-Directed IRA LLC, you will have complete authority to make any authorized investment, such as buying real estate. You can also cover the costs of renovations and subsequently sell the property, all without needing to communicate with the IRA LLC custodian. Since all your IRA funds will be held at a nearby bank under the Self-Directed IRA LLC’s name, you only need to write a check or wire the funds from the IRA LLC bank account to participate in a real estate transaction or any other investment.

By following this process, you will no longer be required to seek permission from an IRA custodian or have them sign the real estate transaction documents in order to make investments. Instead, you can simply write a check to proceed with your investments.

You will never need to obtain approval from a custodian or pay high fees based on account value and per transaction with a Self-Directed IRA LLC.

SELF-DIRECTED IRA LLC BENEFITS

#1 Invest in real estate & much more tax-free

By utilizing a Self-Directed IRA LLC, you will have the capability to engage in various investment opportunities, such as real estate, while benefiting from tax-free status.

#2 Virtually no IRA custodian fees

By utilizing a Self-Directed IRA LLC, excessive custodian fees that are dependent on the account’s value and transaction fees are eliminated. Instead, funds are held by a passive Self-Directed IRA custodian, typically a bank.

The passive custodian can be likened to a piggy bank for your Self-Directed IRA LLC, where you can conveniently access funds for investments without the need to personally interact or visit the custodian. Instead, you can simply write a check from the piggy bank whenever required.

#3 Tax deferral

By utilizing the Self-Directed IRA LLC structure, any income and gains generated from IRA investments will be returned to your Self-Directed IRA LLC without incurring any taxes.

The LLC is considered a pass-through entity for federal income tax purposes, meaning that your IRA, acting as the member of the LLC, is exempt from taxes. Consequently, any income or profits earned by the LLC will be exempt from taxation.

By thinking step by step, you can rephrase the given text while keeping the same meaning. Do not include additional information and do not omit any information. Here is the rephrased version: A multitude of additional advantages can be attained by utilizing a Self-Directed IRA LLC, which include the following benefits:

Better protect your retirement assets from a falling stock market or against inflation.
Make a real estate or other investment by simply writing a check( Truly it is that easy.)
Generate profits tax-free when you use the same Self-Directed IRA LLC to purchase domestic and foreign real estate, private mortgages, gold and stocks, bonds, and mutual funds inside the same plan.
Buy your future retirement home or vacation property now at today’s prices, rent it out, and then move in at the age of 59 and 1/2!
Diversify your retirement portfolio and invest in almost any type of investment tax-free.
Take control of your retirement funds and hold them at a local bank or credit union.
Protect your IRA from creditors or bankruptcy.
Purchase real estate foreclosures and tax liens on the spot, or make personal loans by simply writing a check and generating profits tax-free.