What It Is: This is the classic setup for a Self-Directed IRA custodian. The custodian acts as the middle-man for every transaction and executes on demand. Does the account holder want to buy a property? They ask the custodian to facilitate the purchase. Does the account holder want to pay a bill? They ask the custodian to write a check. Basically, for anything that needs to be done, the custodian is asked to do it.
Pros: This kind of Self-Directed IRA custodian usually has the simplest and most economical setup. Also, there is a lot of interaction between the custodian and the account holder, which gives the account holder ample opportunity to ask questions.
Cons: This kind of account can grow very expensive, as its basic fee structure will either be asset-based or transaction-based. Neither of these are flat fees, and they can really take a bite out of your nest egg. Additionally, relying on the Self-Directed IRA custodian for time-sensitive transactions can be extremely frustrating. Paperwork and delays are standard for most companies, but in the investment realm, the consequences can be substantial.
This Account Is Best For: Investors who are considering low-transaction assets. If you are interested in the kind of investment that is not transaction-heavy, a full-service Self-Directed IRA custodian can be ideal. The setup is cheap, as you won't be managing the asset, and you can get started quickly. Just make sure to choose a custodian that doesn't charge asset-based fees based on the account’s value.
What It Is: Some Self-Directed IRA custodians offer account holders the option of checkbook control. This means that the account holder's IRA is attached to another financial vehicle (like a trust or an LLC), and that vehicle can open up a checking account. What this accomplishes is enabling the account holder to make transactions without going through the custodian. Any purchase or management activity can be accomplished directly by writing a check or sending a wire. In this case, the Self-Directed IRA LLC custodian would still be required to hold the IRA, but it wouldn't have to charge any additional fees.
Pros: The account holder can make as many transactions as they would like at no cost. Additionally, the transactions happen in real-time without any delay.
Cons: The setup fee for a Self-Directed IRA with checkbook control can be significantly higher than for a Self-Directed IRA. (This is due to the establishment of the LLC or trust.) That being said, the cost of setup is usually quickly offset by the savings in fees.
This Account Is Best For: Investors who are considering assets that require a lot of transactions. A common example would be a rental property that requires active management. No transaction or asset fees can help investors retain more of their savings. This kind of account is also good for investors whose investment model requires jumping on opportunities quickly.
Choosing the right Self-Directed IRA real estate custodian depends on the nature of the real estate investment. We can break down real estate investments into two major categories for the purpose of choosing a Self-Directed Real Estate IRA custodian. The first is a real estate investment that is hands-off. This is where the investor contributes funds but a third party handles the management and business side of the investment. Examples of these include private REITs (real estate investment trusts) and private placements. Since involvement in these kinds of investments does not require any kind of transactions from the account holder, the classic Self-Directed custodian is the best fit. The account holder will be responsible for an inexpensive setup fee, light administrative fees, and the custodian's annual account fee. Due to the nature of the investment, though, they will be able to avoid expensive transaction fees.
The second category of real estate investment involves active management. This can include rehabs, fix-and-flips, and rental units. For these kinds of investments, a Self-Directed IRA custodian with checkbook control is a better fit. The reason for this is that these kinds of real estate assets require numerous transactions. Every contractor payment, deposited check, and maintenance action counts as another transaction. With a classic Self-Directed IRA custodian, the fees to handle these transactions can quickly become overwhelming. However, a Self-Directed IRA custodian that offers checkbook control does not charge any transaction fees. The setup may be a little bit more expensive, but it will quickly pay for itself.
Self-Directed IRAs have always been possible, they’re just not well known. The reason is because most big brokerages deal exclusively with stock market products. By opening an account with a specialized self-directed custodian, you get the freedom to invest in what makes sense to you.
It is a simple 3 step process to open a Self Directed IRA at Madison Trust.
(1) Create an account by completing an online application
(2) Fund your account
(3) Instruct Madison Trust to invest in the asset of your choice by filling out an Investment Authorization Form.
Visit How To Set Up a Self Directed-IRA for more information.
Self-Directed IRAs have always been possible, they’re just not well known. The reason is because most big brokerages deal exclusively with stock market products. By opening an account with a specialized self-directed custodian, you get the freedom to invest in what makes sense to you.