How To Choose a Self Directed IRA Custodian
Choosing the best Self Directed IRA Custodian is essential for the success of your retirement investing. However, what qualifies as the “best” can differ based on a number of factors. Let’s start off by discussing what a Self Directed IRA Custodian is and then we’ll explore the elements to consider when making a choice.
What is a Self Directed IRA Custodian?
The IRS requires retirement accounts to be held by a custodial account or a trust. Banks naturally qualify as a trust and that is why almost all banks are able to offer retirement products. However, a Custodian doesn’t have to be a bank, and that is what allows the Self Directed IRA to exist. Standard banks and Custodians don’t allow for self-directed investing in alternative assets (like real estate.) In order to facilitate investing in these kinds of assets, specialized Self Directed IRA Custodians were established. These are institutions that fulfill IRS requirements for nonbank custodians including:
- Fiduciary continuity
- Established location
- Fitness to handle funds
- Fiduciary experience
- Financial responsibility (i.e. a high degree of solvency)
- Capacity to account
- Established rules of fiduciary conduct
- Minimum net worth
How to choose the best Self Directed IRA Custodian
The best choice for a Self Directed IRA Custodian will depend on what kind of assets the investor would like to purchase. Custodians differ greatly in the functionality they offer and the right functionality is key for specific investments. Here are some of the different services that Self Directed IRA Custodians offer their account holders.
- Full Service Custodial
What it is: This is the classic setup for a Self Directed IRA Custodian. The Custodian acts as a middleman 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, anything that needs to be done, the Custodian is tasked with doing it.
Pros: This kind of Self Directed IRA Custodian usually has the simplest and most economic 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 of your nest egg. Additionally, relying on the Self Directed IRA Custodian for time sensitive transactions can be extremely frustrating. Paperwork and delays are par 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 where you just write a check in the beginning and then don’t do anything else, a full service Self Directed IRA Custodian can be ideal. The setup is cheap, there will be no transaction fees 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.
- Checkbook Control Custodian
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. In this case the Self Directed IRA Custodian would still be required 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 Self Directed IRA Custodian delay.
Cons: The setup fee for a Self Directed IRA with checkbook control can be significantly higher than a standard Self Directed IRA Custodian. (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 require 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.
- Asset Specific Custodian
What it is: This is a Self Directed IRA Custodian who specializes in one specific asset. These can usually be found for investments that have achieved a contemporary popularity (e.g. cryptocurrency and gold). This kind of Custodian not only provides the IRA account, but also the asset for purchase.
Pros: The setup and purchase is optimized for the specific asset, so the process is often quick and streamlined.
Cons: This kind of Self Directed IRA Custodian can often charge excessive fees. This can be both from the account side (setup and annual fees), as well as from the asset side (large markups on the purchase).
This account is best for: Investors who want to purchase a specific asset as the entirety of their IRA account, and are willing to pay a premium to be streamlined for that asset.
How much are Self Directed IRA Custodian fees?
Each Self Directed IRA Custodian can use a unique fee schedule and the only way to find out the fees for each is to make individual queries. The possible fees that can be charged by a Self Directed IRA Custodian include:
- Setup – A one time fee to cover the initial setup.
- Administrative – A series of differing fees that cover administrative functioning like processing rollovers.
- Transaction – A series of fees that are applied for every requested transaction (e.g. purchasing an asset).
- Asset-based – A fee charged to the account based on the overall value of the account.
- Annual maintenance – A fee charged annually or quarterly to maintain the IRA account.
- Asset markup – A fee charged by the Self Directed IRA Custodian when pricing the specific asset.
What kind of Self Directed IRA Custodian is best for real estate?
It depends on the nature of the real estate investment. For the purpose of choosing a Self Directed IRA Custodian, we can break down real estate investments into two major categories. 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 REITs (real estate investment trusts) and private placements. Since involvement in these kind 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 is that which involves active management. This can include rehabs, fix-and-flips, and rental units. For these kinds of investments, the Self Directed IRA Custodian with checkbook control is the better fit. The reason for this is that these kind 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.