Watch Out! The Worst Kinds of Self-Directed IRAs & How to Avoid

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Finding the best self-directed IRA company can be challenging when you don't know where to start. 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 retirement 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 to reach their retirement goals. 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 or retirement savings 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 Account

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, private equity, and other non-traditional investments. In fact, Internal Revenue Code Section 4975 states that the only investments NOT allowed in retirement accounts are collectibles and life insurance.

To do: Whatever alternative investment you are interested in, ask the salesperson or your 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.

Relevant: How to Compare Self-Directed IRA Providers 

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 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 IRA custodian and compare your experiences. As an investor, it's very important that they can explain if your strategy is a prohibited transaction or a prohibited investment. One error can cost you huge tax penalties.

The Dumb Self-Directed IRA

Have you ever left or fired a company at some point? You know when it's time to move on. Don't get stuck with a "dumb" financial institution. What I mean is, as an IRA owner you need to find a company that can help you grow. A SDIRA custodian is a passive custodian and should not give you investment advice. However, they should be able to discuss and educate you on prohibited transaction rules, IRA assets allowed, and if the investment choice for your retirement plan raises any red flags.

To Do: Come up with a scenario of an investment opportunity for an alternative asset or a transaction that is not allowed. If they still ask you to sign the dotted line, move on.

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 or checkbook control. Verify the annual fees or taxes you might get stuck with If you choose an LLC. Depending on the investment and how many, you may not need an LLC.

The Cheap Self-Directed IRA

Growth and competition in the self-directed retirement 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 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 their fee structure. Do you need exclusive services? What exactly are you paying for? Put your money in your IRA or your investment, not in their pocket.

To do: Compare prices to make sure you are getting what you are paying for and understand the fees for your investment of choice.

Relevant: 3 Things Investors Really Hate About Self-Directed IRA Custodians

Finding the Best Self-Directed IRA for Real Estate

In order to hold a real estate investment, like a rental property for example, 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 a self directed IRA account, look for an IRA custodian 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 companies to find the right one.

In a Nutshell

With a Self-Directed Individual Retirement Account (SDIRA) you have many investment options as well as IRA custodian choices. So, take the time to compare and find the best one. 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 self-directed IRA company.

Relevant: How to Compare Self-Directed IRA Providers 

Self Directed IRA FAQs

What is the best self directed IRA company?

The best self directed IRA company should have these 3 qualities: Low fees, excellent service, and a  knowledgeable team. You should compare providers before choosing a company. You should also make sure that the company is a custodian and it is directly audited by a government entity.

How do I choose a self directed IRA custodian?

The best way to find a good custodian is to do a comparison of services and fees. You can also do a google search for recent lawsuits and reviews involving that custodian. Every company is different so be sure to research how knowledgeable they are, their focus, and their strengths.

How do I find the best self directed IRA for real estate?

You can find the best company for your real estate IRA investments by calling around to compare with this checklist. Because real estate is one of the most popular investments in self-directed IRAs, there are many companies to choose from— choose wisely.


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