Self-Directed IRA Business Structure - Feedback please

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Self-Directed IRA Business Structure - Feedback please

Nick Scalero
Real Estate Investor · Mountain View, CA · Member since 2008 · 53 posts · 6 votes

So I have this chunk of change in my IRA. I found a company (NAFEP) who will be the custodian for a small fee. They will setup a Trust for me and buy interest in the Trust from the cash in the IRA. The cash will go into a bank account in the name of the trust and I can write checks to buy assets (with some restrictions).

So I put $200 - 250K in, purchase a property or two (also in the name of the Trust). The rental income from the property goes back into the bank account. the property appreciates, hopefully... ;0)

I can also open a brokerage account (also in the name of the Trust) and fund the brokerage account from the checking account. That way I can reinvest the small amounts of monthly income from the property into traditional assets (i.e. securities). and keep the money compounding that way.

Setup cost is reasonable and I'm not ready to discuss ROI, etc. This is not a business plan. I only want to get feedback on the structure.

It seems that the only items I'd have to manage are the bank account, brokerage account and rental property (or use management). The Trust would have to have an annual tax return, but I will pay someone to do that.

I don't need dispursements for more than 10 years.

If I die in the meantime, the Trust and it's associated accounts and assets would go to my wife as benificiary.

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y

I've done a similar thing with Guidant Financial using an LLC rather than a trust. Its worked out OK, though it is somewhat expensive to set up, about $3000.

The irritating thing is the current custodian, Trust Company of America, has raised its fees. In addition, its requiring you to keep some cash in their account, where previously all the cash is in the LLC. They're removed the limit on the liquidation fees, which were previously capped at $500. For your $250,000, they would now take $2,500 if you moved your money away from them. Guidant has a new company, IRA Services, that will take over, but you still have to pay the $500 to get the money away from TCA and IRA services does require you to keep some money in their account, too.

So, this all works OK, but its not quite as trouble free as they might lead you to believe.

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  • Account Closed
    Real Estate Investor · Rancho Mirage, CA · Member since 2008 · 109 posts · 56 votes
    16y

    As long as you have check book control that might not be a bad way to go. But when you say there are some restrictions it makes me happy I don't have to deal with a custodian and have true checkbook control. That's the only piece that sticks out for me.

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  • Nick Scalero
    OP
    Real Estate Investor · Mountain View, CA · Member since 2008 · 53 posts · 6 votes
    16y

    The restrictions are the normal IRS restrictions (can't buy collectables, can't buy then live in the property, etc).

    As long as it's a self-directed IRA there does have to be a custodian for the IRA, no matter what the structure is. That's my understanding of it.

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y

    You need to be very careful of the ongoing fees that the custodian will charge you. For instance, there is usually a management service fee. Generally this fee can be as high as 5% per annum billed monthly.

    Look for transactional fees as well. Every time you write a check, a service fee is charge. On their own, this fee might be minimal but if you write several checks a month, it will add up.

    If your buying a property, you need to be able to set-up a separate entity for each property and then capitalize a separate account for each investment. This way, you add asset protection for trust, plus your writing less checks from your custodian account. Each investment should also be pass-through for tax purposes.

    I recommend you further investigate the fee schedule before you commit. I have heard the custodian accounts charging extraordinary fees because once set-up, it can be very costly to undo or redo a trust.

    Good Luck.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    I've done a similar thing with Guidant Financial using an LLC rather than a trust. Its worked out OK, though it is somewhat expensive to set up, about $3000.

    The irritating thing is the current custodian, Trust Company of America, has raised its fees. In addition, its requiring you to keep some cash in their account, where previously all the cash is in the LLC. They're removed the limit on the liquidation fees, which were previously capped at $500. For your $250,000, they would now take $2,500 if you moved your money away from them. Guidant has a new company, IRA Services, that will take over, but you still have to pay the $500 to get the money away from TCA and IRA services does require you to keep some money in their account, too.

    So, this all works OK, but its not quite as trouble free as they might lead you to believe.

    1Reply
  • David Breitzmann
    San Francisco, CA · Member since 2009 · 171 posts · 24 votes
    16y

    [q]The rental income from the property goes back into the bank account. the property appreciates, hopefully... ;0)[/q]

    Nick, I know you're not evaluating a business plan. However, you offered a 10 year window. As such, I'm unsure as to why it's founded on "hopeful" appreciation instead of positioning for net gains at closing?

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  • Nick Scalero
    OP
    Real Estate Investor · Mountain View, CA · Member since 2008 · 53 posts · 6 votes
    16y

    David,

    I expect net gains at closing ten years down the road but... it's still just a market and there could be some future interruption to that market or even our economy as a whole. I guess I'm just a glass half-empty kind of guy. Hope for the best but prepare for the worst.

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