Self-directed IRA: What criteria to choose a custodian/admin?
Rental Property Investor · NJ and PA · Member since 2019 · 206 posts · 105 votes
Self-directed IRA is an amazing way to take tax-deferred advantage of the cash I have piled up in my 401k, and funnel it into real estate. I intend to take the plunge immediately, but there are so many providers out there (biggerpockets.com/rei/self-directed-ira-real-estate), what criteria do you use to choose one? I've examined a half dozen websites, and don't see any difference among them.
Most of them want me to fill out a form to get more info, but I know if I fill out forms with a dozen of these, I'll get buried in spam for months -- a lesson I learned long ago after searching for mortgage rates.
So far, the only site I've seen that provides any concrete, practical information is Equity Trust. They provide a very useful fee schedule (www.trustetc.com/fees). These fees are very small compared to the tremendousvalue of unlocking my 401k for REI... But I don't have useful information from any of the other providers.
Has anyone done research on this? Any advice? Thanks!
As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.
What I can help you do, however, is refine your question.
Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.
A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.
A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.
A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.
So, as you continue your research and get feedback here on BP, think about what type of program will best suit you needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.
As a plan provider, I cannot make a specific recommendation as to a company to work with per BP guidelines.
What I can help you do, however, is refine your question.
Self-directed IRA's come in several formats offered by different types of companies. The type of self-directed IRA that will best suit your situation and goals will drive the process of identifying the right firm to work with.
A self-directed IRA custodian is a processing entity. Think E*Trade or Fidelity with different paperwork. All IRA based plans are required to have a custodian to administer and report on the account. What makes a self-directed IRA custodian different is that they are not purely connected to the public exchanges and limited to investing in stocks, bonds and funds, but rather have the staff training and paperwork to document the IRA's investment in the more individualized transactions that occur when investing in real estate, notes and other non-traditional assets. Such custodians will hold funds, sign documents, issue expenses and receive income on behalf of your IRA and act as your processing layer. This works OK for relatively static and simple investments like a private placement or crowdfund, but can become rather cumbersome and expensive with a more time sensitive and transaction intensive asset such as a rental property. You also need to be aware that custodians are passive in nature and simply process transactions at your direction. They do not provide meaningful oversight or guidance with respect to tax code compliance.
A checkbook IRA LLC is an enhancement on the above structure that is generally more time and cost efficient for investors with a more diverse portfolio. It starts with a self-directed IRA held by a custodian, but the IRA simply makes one investment into a specially designed LLC entity. The IRA owns the LLC, but you can be the non-owner manager of the LLC and have signing authority. This allows you to directly manage transactions via the LLC and eliminates the paperwork, processing delays and per-transaction fees of the custodian. These plans typically cost a bit more to establish due to the legal work, but in most cases will save you considerably over the long term. With a quality provider, such plans also come bundled with meaningful consulting guidance to help you get the most out of the program while staying inside the IRS guidelines.
A similar checkbook program is a Solo 401(k). Such plans are available to those who have some form of self-employment and no full time employees. As an owner-only business retirement plan, the Solo 401(k) has higher contribution limits, allowing you to build your savings on the front end as well as providing investment flexibility. The Solo 401(k) also has the advantage of being more favorable for real estate investments using debt-financing such as a mortgage - as the 401(k) is exempted from a small tax called UDFI that an IRA would pay on the percentage of income derived from the borrowed money.
So, as you continue your research and get feedback here on BP, think about what type of program will best suit you needs and be sure to ask questions along that line. Get on the phone and speak with a few of the providers that are active here on BP. You will pretty quickly be able to tell who is just selling something and who can become a valuable member of your team.
@Brian Eastman Thank you for your thoughtful and thorough response. Actually I knew the distinction about custodian -- typing that was a mistake. But thanks for clarifying. I also appreciate your carefulness to limit your answer to what's responsible and ethical (and legal, I suppose :-). I deliberately asked for criteria, not recommendations of companies. Otherwise, I might get a whole lot of "I like company X" response, when really what I want is to know what variables to consider to make a decision for my own situation!
So... An example of the kinds of things I want to know about is... Are there different kinds of fee structures? Equity Trust charges based on the size of your assets, and the percentage diminishes sharply as the number increases. What do others do? Do they charge based on some other criterion?
Also, is there a significant cost associated with rolling funds over, or can I do that as I need to? For example, if I rolled over $300k from the start, I would have those funds easily available for deals, but meanwhile it would be collecting dust while while I look for a deal, instead of appreciating in my 401k. Can I move funds to the SDIRA , ad hoc, as I need them or is there some cost or prohibition on too many of those rollover transactions?
Also I'd love any advice for how to systematically evaluate providers -- other than visiting 50 websites that all seem to be about the same!
Thanks!
Equity Trust is a custodian, and does not offer or support the checkbook IRA LLC model.
There are a variety of pricing models in the custodial range of services, from asset based to flat fee-per-transaction and a variety of hybrids. Quality of service and pricing definitely do not correlate, as many of the higher-priced custodians have some of the least responsive customer support.
With checkbook plans, the role of the custodian is minimized and you may find a very low flat-fee for the custodial administrative services- usually not on the custodian's web site, but by private arrangement with the advisory firms like mine that offer the legal and consulting side of the service. There are also then fees with the checkbook plan provider. You'll pay more up front for this type of service, but generally save considerably over time and have access to much higher quality of service and meaningful advice if you choose a quality provider.
@Brian Eastman I forgot to mention in my reply above that I definitely am looking for the checkbook model. I intend to run my own business, but under the umbrella of the SDIRA. (And I understand the prohibitions against self-dealing and having family members, etc. involved.)
I sent you a separate message to follow up individually. Thanks!
Here are some issues to consider in choosing an Self-directed IRA provider:
1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.
2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.
3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).
4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).
5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.
In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.