Self Directed IRA Custodians

10 Replies

I've decided to use a few old 401k and IRA accounts to fund some real estate deals. I know that I will need a self directed IRA custodian but thus far I haven't found a company that looks trustworthy. If anyone has had a good experience with their custodian, can you please name the company and explain why you like them. Looking for someone that can move quickly to write checks when I have a deal.

Thanks 

@Corey Hill

Strata Trust Co out of TX has done pretty well for us.

Fees have crept up last couple of years but I still fnid their service and everything to be pretty solid.

@Corey Hill

You don't want the custodian cutting checks for you. That's the most expensive way to do anything in a SDIRA. The fees for each transaction really add up. You want checkbook control. Then you only pay one yearly fee, mine is under $300, once your initial account/LLC is set up. I use ENTRUST and have had no issues and no fee increases in 3 years.

@Corey Hill

In our case, cutting a check for a purchase has been no longer than a traditional closing, HOWEVER from my recollection one thing have to be in place for that to happen:

The entity on the purchase agreement has to be in line with your custodian's compliance standards. Basically YOUR name cannot be on the purchase agreement. At least in Strata's case they have a form you fill out and it's best to talk to someone really early on in the process - IE: when you're offering. Make sure you do the proper introductions with your agent and the company and their processes. If the communication is there for everyone we haven't had delays due to having the IRA do the purchase.

As far as cutting checks for say, having work performed during a rehab, that's what @Mike Kirby is touching on I believe. My experience has been that getting a rehab done under the IRA is challenging given your custodian's need to stay compliant. We haven't gone down the road of checkbook control, so we have had to submit paperwork for each expense. It tends to be that we'll need to hire out larger chunks of work under the IRA than outside of it, from a paperwork perspective. There's also other implications of buying fixer upper properties under an IRA.

But, it's worked well.

Strata to my knowledge has no fee on a per expense payment basis.  So Mike's not correct that ALL custodian's operate that way.  However, I do think Mike's correct in the overall conclusion that the checkbook control brings benefits and speeds things up.  After all, even letting a contractor know that they have to wait a week to have a check show up and take 50+% of contractors out of the picture right off the top in our market.  So many want to work for cash, after all....

@Corey Hill

Just re-read your question.  To answer more succinctly - usually about 4-6 business days from the request coming in, has been when the check arrives in the mail.

They have wire options for sending stuff directly to a bank say for a closing, etc at I think a $25 charge.

@Corey Hill

To be clear, your IRA is not funding your deals. The IRA is the investor in the deal. There are very strict rules about keeping IRA investments at arm's length and exclusively for the benefit of the IRA. Your language is vague about your intentions, but wanted to make sure you understand this key point.

If your IRA is investing in deals that require any frequency of transactions or transactions that are time sensitive, then you will want a plan that offers you checkbook control. Waiting 3-5 days for a custodian to process a transaction and issue funds, and paying per-transaction fees (often expedited) will be impractical to say the least.

Checkbook control can be achieved by having an IRA with a self-directed custodian make a single investment into a legal entity such as a LLC or statutory trust where the IRA is the owner and you can act as the signer. You then can deploy the capital into transactions directly via the legal entity without need for custodian interactions.

If you are self-employed and have no full time employees, there is an option for a Solo 401(k) that also provides checkbook control.

As to your "trustworthy" comment, be advised that all IRA custodians are regulated in the same fashion. The specialty institutions that handle non-traditional investments are generally going to be smaller than the big Wall St. players - who just don't do this type of processing. These smaller custodians still need to jump through all kinds of regulatory hoops focused on fiduciary responsibility and compliance with state and federal banking laws. While in cash with the custodian prior to investing, your funds will be FDIC insured to $250K just like any other bank/IRA account.

Another key difference between custodians and the specialty advisory firms that create checkbook plans is that custodians by rule are very limited in terms of guidance they can provide.  They are passive processing agencies.  Quality providers of checkbook plans will include access to expert guidance with respect to compliance with IRS rules.

You make some great points Mike.  I will look to gain checkbook control of the account and will look into ENTRUST. 

Thanks 

Originally posted by @Mike Kirby :

@Corey Hill

You don't want the custodian cutting checks for you. That's the most expensive way to do anything in a SDIRA. The fees for each transaction really add up. You want checkbook control. Then you only pay one yearly fee, mine is under $300, once your initial account/LLC is set up. I use ENTRUST and have had no issues and no fee increases in 3 years.

 

Thank you for your time and suggestions Brian, I will take your notes into consideration.  

Originally posted by @Brian Eastman :

@Corey Hill

To be clear, your IRA is not funding your deals. The IRA is the investor in the deal. There are very strict rules about keeping IRA investments at arm's length and exclusively for the benefit of the IRA. Your language is vague about your intentions, but wanted to make sure you understand this key point.

If your IRA is investing in deals that require any frequency of transactions or transactions that are time sensitive, then you will want a plan that offers you checkbook control. Waiting 3-5 days for a custodian to process a transaction and issue funds, and paying per-transaction fees (often expedited) will be impractical to say the least.

Checkbook control can be achieved by having an IRA with a self-directed custodian make a single investment into a legal entity such as a LLC or statutory trust where the IRA is the owner and you can act as the signer. You then can deploy the capital into transactions directly via the legal entity without need for custodian interactions.

If you are self-employed and have no full time employees, there is an option for a Solo 401(k) that also provides checkbook control.

As to your "trustworthy" comment, be advised that all IRA custodians are regulated in the same fashion. The specialty institutions that handle non-traditional investments are generally going to be smaller than the big Wall St. players - who just don't do this type of processing. These smaller custodians still need to jump through all kinds of regulatory hoops focused on fiduciary responsibility and compliance with state and federal banking laws. While in cash with the custodian prior to investing, your funds will be FDIC insured to $250K just like any other bank/IRA account.

Another key difference between custodians and the specialty advisory firms that create checkbook plans is that custodians by rule are very limited in terms of guidance they can provide.  They are passive processing agencies.  Quality providers of checkbook plans will include access to expert guidance with respect to compliance with IRS rules.

 

@Corey Hill

If you are eligible for a Solo 401k plan, you can skip the custodian altogether. If you do not have any self-employment activity, a self-directed IRA will be your only option and you'll need to have a custodian. Checkbook control can provide some peace of mind, however, as you would have direct control over the assets and greatly reduce the day to day role of the custodian.

@Corey Hill

Without naming specific custodians, because some good ones have already been suggested, I just want to mention a couple of additional things you should look for:

  1. The IRA custodian is a chartered trust company and they are operating out of the state the trust company is chartered in. As state banking regulators are increasingly focusing on self-directed IRA custodians, they have really discouraged companies that have ‘servicing centers' in one state but are chartered in another. This is important in that you'll have continuity with operations and there won't be any major changes as firms try to comply with ever increasing regulations.
  2. That the SDIRA custodian isn’t just a Third-Party Administrator. This is in line with the above, in that, as regulations increase it has become harder for non-trust companies to stay compliant. There are many great third-party administrators but I see it becoming harder and harder to operate as time goes on.
  3. They can tell you exactly where your cash balance is located (assuming you don't set up a single-member LLC and have your funds directed to a bank account established by that entity). Some custodians will invest your cash into a variety of CDs at numerous banks so they can increase the float that they make on the money. To me, this is problematic because you don't actually know where your money is and while they'll claim that it increases your FDIC insurance coverage, in reality, if you already have the maximum amount of cash in a retirement account at that bank and they have a CD there then you actually aren't covered. Would this ever really be an issue? Probably not, but I prefer to know exactly where my funds are and work with a trust company that has a few of banks that they work with and disclose to you.

Regardless of whether you have your IRA own the property directly or you have your IRA invest into a single-member LLC that then owns the property I would want to be aware of the above points. As the IRS continues to take a closer look into self-directed IRAs and increase reporting standards (all IRA custodians now have to report alternative assets on the form 5498) I would want to make sure that I'm working with a firm that is doing everything they can to reduce any headaches with the state banking regulators and the ever increasing heavy hand of the IRS.