11 FAQs about Self Directed IRA Custodians
When it comes to planning for your retirement, you want to get it right. It all starts with choosing the right account type and the right company to hold your assets. This can be done through research and by asking the right questions.
Are you looking to diversify your retirement portfolio with alternative assets like real estate, private companies, precious metals, and more? If so, a Self Directed IRA account may be the right account type for you. This type of IRA must be held by a Self Directed IRA custodian. You may ask, what is a Self Directed IRA custodian? Why do I need a custodian? How can I choose the best Self Directed IRA custodian for my financial situation?
We compiled a list of frequently asked questions and answers about Self Directed IRA custodians. This way, you can focus on investing, diversifying, and growing your retirement portfolio.
1. Do I need a Custodian for my Self Directed IRA?
Absolutely! The Internal Revenue Code (IRC) Section 408 details that all IRAs must be held by a Custodian, such as a Bank or a Trust Company.
2. What is a Self Directed IRA Custodian? What is the role of a Self Directed IRA Custodian?
A Self Directed IRA (SDIRA) Custodian is responsible for administering the account and holding custody of the IRA’s assets. Banks typically hold stock, bonds, and mutual funds. A SDIRA Custodian holds alternative assets such as real estate, private placements, precious metals, and beyond. Now you can truly diversify your retirement portfolio!
3. What is My Role as a Self Directed IRA Accountholder?
As the name implies, “self directed”, the accountholder has the sole responsibility for doing due diligence and evaluating an investment before directing the custodian to invest. Some of your responsibilities as a Self Directed IRA accountholder include:
- Selecting a custodian that allows you to invest in the assets of your choice.
- Choosing, directing, and managing investments in your retirement account, based on your risk tolerance and financial goals.
- Seeking appropriate tax or legal advice.
- Conducting proper due diligence.
- Understanding Prohibited Transaction rules and how to avoid them.
- Acknowledging the risks related to the investment(s).
- Providing annual valuations for all Self Directed IRA assets.
- Understanding that certain investments in operating companies and debt-financed real estate can generate Unrelated Business Income Tax (UBIT) or Unrelated Debt Financed Income (UDFI).
4. What are the different types of Self Directed IRA custodians?
There are two different types of Self Directed IRA custodians, Brokerages and Alternatives. Brokerages restrict investments to stocks, bonds, and mutual funds. On the other hand, Alternatives allow accountholders to invest in a full range of assets.
Brokerage Self Directed IRA Custodian – A number of brokerages offer a limited Self Directed IRA. As the custodian, they allow you to self-invest in different market products. These products include stocks, ETFs, and mutual funds. Noticeably absent are any true alternatives. Real estate or startups are not part of the list.
Choosing a brokerage as a Self Directed IRA custodian is good for investors who want to stay in the stock market. Features can include no-load and no-fee mutual funds and no-fee stock trades. These brokerages also offer a lot of data and research tools. If you do not plan on diversifying with alternatives, then a brokerage Self Directed IRA custodian may be a good fit.
Alternative Self Directed IRA Custodian – Most Self Directed IRA custodians allow accountholders to invest in a range of assets. They offer general accounts that can hold any asset permitted by the IRS. (The only two assets not permitted are collectibles and life insurance). Most people searching for a Self Directed IRA custodian will be looking for this kind of account.
To invest, the accountholder will identify the asset and fill out the Investment Authorization Form. Then, the Self Directed IRA custodian will purchase it. A similar process is used for selling an asset.
Self Directed IRAs are good for low-transaction assets. Why does the number of transactions matter? Because some custodians charge transaction fees. If there are not a lot of transactions in your investments, then these transaction fees will be nominal.
Low-transaction like private placements, loans, or one-time startup investments are great for a Self Directed IRA.
High-transaction assets like most forms of real estate, may be better suited for a Checkbook IRA (see next question).
5. What is Checkbook Control? Can I open a Self Directed IRA with Checkbook Control?
Checkbook control is the term used when a Self Directed IRA owner has complete control over their retirement funds. This is achieved through the establishment of an IRA LLC or an IRA Trust. Checkbook control allows the accountholder to make transactions in real-time.
The way it works is the custodian (or trusted partner) will establish a business entity (IRA LLC or IRA Trust) for the Self Directed IRA. Next, the IRA account will fund the LLC or Trust to give it working capital. Then, the accountholder will open a checking account in the name of the IRA LLC or IRA Trust.
At this point, the account holder can start investing. Assets are purchased by writing a check or sending a wire from the checking account. Similarly, when an asset is sold the proceeds go directly into the LLC or Trust.
An investor should seek out a Self Directed IRA custodian who offers checkbook control if they plan on purchasing a high-transaction asset. Many real estate investments require a number of transactions. For a fix-and-flip, the transactions add up when paying contractors and purchasing supplies. For rentals, account holders perform multiple transactions with rent collection, rehab, and maintenance.
In terms of price, gaining checkbook control has a higher setup fee and possibly an annual LLC fee. In most cases, though, these are relatively low in comparison to constant transaction fees. Before calculating the possible savings with checkbook control, you will need to have a solid grasp of the transactions your asset(s) will entail.
6. Does a Self Directed IRA Custodian provide valuations for my investments that are not publicly traded?
No. Self Directed IRA Custodians only report the valuations it receives from the investment sponsor or the independent valuation submitted by the account owner. A Self Directed IRA does not guarantee the accuracy of any valuation it reports.
Madison Trust will reach out to you between the end of the year through January to request the Fair Market Value (FMV) of your IRA. You can easily provide this information by logging into your online account or by submitting the IRA Asset Valuation Form.
7. What are the risks of investing with a Self Directed IRA Custodian?
Since Self Directed IRA custodians are passive, they cannot give investment advice. Therefore, it is crucial to perform your own due diligence. Please contact your tax and financial advisor for any financial advice.
Self Directed IRA Custodians are not responsible for verifying the legitimacy of investments. Be aware that fraud can occur. A Self Directed IRA custodian can only hold and administer assets in the account. If a Self Directed IRA company is claiming to protect against losses or is recommending investments, it is most likely fraudulent.
8. Who regulates Self Directed IRA Custodians?
Custodians are regulated by state and federal law. They must comply with IRS requirements and are overseen and regularly audited by the regulating state. Madison Trust is a South Dakota chartered Trust Company. We are regulated by the Division of Banking of South Dakota.
9. What is the difference between a Self Directed IRA Custodian, IRA Administrator, and IRA Facilitator?
Self Directed IRA Custodian – As described in the questions above, a Self Directed IRA custodian handles the transactions and holds the assets on your IRA’s behalf. Some custodians, like Madison Trust, also provide administrative duties such as generating statements and documents.
IRA Administrators – IRA Administrators are not subject to the same regulatory requirements as a custodian; they act as third-party administrators for your retirement account. Therefore, they do not have the same level of authority as a custodian. They can help you create an IRA account and can complete administrative tasks. However, they cannot conduct transactions or hold assets like a custodian.
IRA Facilitator – A company that offers products such as an IRA LLC or IRA Trust. A facilitator alone does not have the capacity or authority of a custodian and is often associated with an IRA custodian. Madison Trust works seamlessly with our sister company, Broad Financial, who will establish the IRA LLC or IRA Trust if you choose the checkbook control model.
10. What are the features of the best Self Directed IRA Custodian?
Seamless Experience – Investing in the assets you want should be as simple as possible. You do not want to be limited to certain assets or get caught in a confusing process.
Madison Trust lets you invest in almost any alternative asset that adheres to the rules and regulations that govern Self Directed IRAs. A Self Directed IRA Specialist at Madison Trust can guide you every step of the way so you can start investing quickly and hassle-free.
Client Support – Client support amongst Self Directed IRA custodians can vary greatly. Some “bargain basement” options will provide you with the required documents but not much else. Others will provide free support the first year but then charge a premium afterward. Others will provide ongoing support and consider it covered by the annual fee. Read the details carefully to find out what your custodian is offering.
Even amongst similar client support options, the quality can vary. Start your research like you would for any company. Read Google reviews, Better Business Bureau (BBB) listings, and opinions on forums. You can also check out fees and reviews on the Self Directed IRA Reviews website.
Madison Trust offers free, lifetime support. When you call us, you will be serviced by a knowledgeable, friendly representative. We are proud of our A+ rating on the BBB and hold the highest rating in the industry across all online rating platforms.
Economical Setup and Straightforward Fees – Every Self Directed IRA custodian has a unique fee schedule. At Madison Trust, as your investments grow, your fees will stay the same. Amongst the lowest in the industry, our flat-rate fee schedule ensures that you will never pay more for investing in your future.
Secure Investing – When it comes to your retirement funds, security is a top priority. Make sure the custodian you choose has systems and controls in place to protect your personal and financial information.
11. What Fees are Associated with Self Directed IRAs?
Here is a list of the more common fees associated with a Self Directed IRA. Keep in mind that it would be unusual for a Self Directed IRA custodian to charge all these fees. For example, an account with checkbook control will likely not be paying transaction or asset-based fees. Similarly, a general account will not be paying any LLC fees. In all cases, do not be afraid to ask questions and get the answers you need.
- Setup fee – Every IRA must be held by a custodian. The setup fee is the cost to create this account.
- Transaction fees – Includes any transaction that involves the custodian. This includes transactions like buying an asset or cutting a check. Look carefully at fee schedules, as there can be different transaction fees based on the specific type of asset.
- Annual fee – This is also known as a maintenance fee. It covers basic paperwork and IRS filings. Usually, it takes the form of a flat fee.
- Asset-based fee – This is like the annual fee, but instead of being flat, it is asset-based. The fee charged will be a percentage of the amount that is being held by the Self Directed IRA custodian. Madison Trust does not charge asset-based fees.
- Administrative fees – Includes document processing, distributions, and termination fees.
- LLC setup fee – When applicable, this will depend on the state where the LLC is being set up.
- LLC annual fee – Some states charge an annual fee for the upkeep of the LLC.
- Client support fee – Some Self Directed IRA custodians charge for continuing client support. Others provide it as a free service.
When comparing Self Directed IRA custodian fees, you can start with these steps:
- Identify the kind of alternative asset you would like to invest in. If you already have a specific asset in mind, this will be easy.
- Choose 2-3 Self Directed IRA custodians who can handle that type of asset.
- Estimate the value of the asset and how many transactions it will require on a monthly or annual basis.
- Estimate expected fees to be charged based on the custodian’s fee schedule.
Saving for retirement is beyond important for your financial future. It all starts with choosing the right account type and company to hold your assets. As you begin your research, it is helpful to ask as many questions as possible and determine your investment strategy. Whether you choose Madison Trust as your custodian or not, our Self Directed IRA Specialists are here to answer your questions.