Believe me, after 16 years in the self-directed IRA industry, I’ve heard it all: the good, the bad, and the downright weird of self-directed IRA companies. I often talk to account holders and pick their brain on how they went about finding the right custodian. Usually they have a story about what went wrong and it's exactly why I remain committed to the promise of Self-Directed IRAs (SDIRA). I believe that everyone has the right to make their own investment decisions, and pay affordable rates, while receiving best-in-class service. I also believe passionately in the power of knowledge and making what seems complex simple.
If you are considering a rollover or transfer of your IRA account to a self-directed IRA for alternative investments, what you don’t know can hurt you. Finding the best self-directed IRA custodian or trust company requires due diligence. Here are some of the worst kinds of self-directed IRAs and how to avoid them.
The Not So Self-Directed IRA
Some financial institutions or brokerage firms offer a self-directed IRA. But just how self-directed is it? Too often, their idea of self-direction is giving you a list of boxes to check off to indicate your investment choices. A truly self-directed IRA allows you the freedom to invest in assets typically not on the list: real estate, private placements, and other non-traditional investments. In fact, Internal Revenue Code Section 4975 states that the only investments NOT allowed in IRAs are collectibles and life insurance.
To do: Whatever asset you want to invest in, ask the salesperson or financial advisor if it can be held in a self-directed IRA at that institution. If the answer is no, keep looking. Most brokerage firms don't allow these types of investments in their retirement plans because they specialize in more traditional offerings like stocks, bonds, and mutual funds.
The Silent Self-Directed IRA
We’ve all called a business only to have the call answered by a robotic voice offering a list of options “to better direct your call.” When you finally reach a person, he often can’t help you and you are routed to the next level of support. And if that level of support cannot answer your question, you get routed again. Sorry to say, this happens in the self-directed IRA industry as well. It could be a sign of high staff turnover or a lack of employee education and training.
To do: Research the company’s leadership team, staff, and history. If they can’t answer your questions, try another firm and compare your experiences.
The Required Self-Directed IRA LLC
Some self-directed retirement companies require that you create an LLC for your self-directed IRA. They will even generously offer to create it for you. That’s because they make profits from creating LLCs. Most of these companies also offer low fees and very attractive incentives to go along with the LLC. These firms are counting on you not knowing that an LLC is not always required or desirable.
To do: Do the research to see if your IRA investment strategy requires an LLC. Verify the annual fees or taxes you might get stuck with If you choose an LLC.
The Cheap Self-Directed IRA
Growth and competition in the self-directed IRA space have reduced fees. That’s good, as far as I’m concerned. What’s not good are companies touting what looks like a good deal or discount, but they come with a lot of fine print and very bad service. So beware. During the tax season you will see a lot of these IRA offers.
To do: When researching companies, compare fee schedules, but even more important, compare the service, response times, and the answers to your questions. Cheap doesn't always mean best.
The Bloated Self-Directed IRA
Self-directed IRA companies come in many forms and sizes. Or should I say, fees and sizes? It seems that the larger the company, the higher the fees. Perhaps they offer exclusive services that justify these fees. Do you need exclusive services? What exactly are you paying for? Put your money in your IRA, not in their pocket.
To do: Compare prices to make sure you are getting what you are paying for and understand any additional fees.
Finding the Best Self-Directed IRA for Real Estate
In order to hold real estate investments, like rental properties for example, in an IRA, you need a company that specializes in real estate investments in IRAs. The self-directed IRA industry is growing and there are many types and sizes of companies. Some companies offer the "one-stop-shop" experience providing many services to up-sell you. Others specialize in a specific type of investment, for example precious metals but, there are some that specialize in real estate like IRAR Trust.
To do: If you are interested in real estate investing within your IRA account, look for a company that not only specializes in real estate but also focuses on training their staff in “all things real estate”. Whether you have a Traditional IRA, Roth IRA or other type of retirement account, knowledge is key to make a real estate deal happen in a timely manner. Do your research, make some calls, and compare.
In a Nutshell
With a Self-Directed Individual Retirement Account (SDIRA) you have many investment options as well as company choices. So, take the time to compare. You don't want to get stuck with the worst type of IRA custodian when you now have all the tips to choose the best.
If you want more insights and education (no fluff) into the real wonderful world of self-directed IRAs, subscribe to our self-directed IRA blog. And if you enjoyed this article, share it. Happy investing!