My SD IRA custodian just stole my money! **need advice**

[Andy M.]

Backstory: My SD IRA custodian (American Pension Services) went into receivership earlier this year. They have been sorting through the whole mess and apparently the owner made some bad choices and 25 million is missing. The courts have decided to allocate the loss across every account holder by taking 10% of their funds to cover the loss.

Yep, it sucks, but here we are.

Here is the advice I need from you seasoned SD IRA pros.

1. I need a new custodian, who do you recommend? I want someone simple to work with, and speed of transactions is important.

2. Should I move towards an LLC with checkbook control? I didn't set up my current accounts that way. But it seems to favor speed, but also takes away a layer of separation.

Thanks!

[Dmitriy Fomichenko]

@Andy M. 

unfortunately this is one of the disadvantage when third party is involved :-( 

And sadly APS is not the only company which misappropriated the funds, see this article in The Wall Street Journal about major players Equity Trust and Entrust being sued:

http://online.wsj.com/news/articles/SB100014240527...

Self-directed IRA LLC will eliminate this problem because custodian no longer holding assets/funds of the IRA, but instead you as the manager of the LLC (owned by your IRA) control it.

But there is even better option: self-directed, trustee managed Solo 401k plan. With this investment vehicle you don't need a custodian, you are in total control, you have checkbook access to your retirement funds, and few other major benefits... Here is an article with more details that I wrote recently on BP blog:

http://www.biggerpockets.com/blogs/2810/blog_posts...

In order to establish Solo 401k you need self-employment or business activity, but looking at your profile it seems that you would be good fit for it.  

[Phil G.]

@Andy M. 

I would definitely use an IRA LLC (checkbook control) or a self-administered solo 401(k), if you qualify. I have both and wouldn't want my money in the hands of an organization that isn't covered by insurance like FDIC or SPIC. I only leave a few hundred dollars in custodial funds to cover the fees. I've had good luck with Equity Trust, but then again, when you're using an IRA LLC, your involvement with the custodian is pretty limited. Once a year, I either directly deposit my annual contribution with them or do a transfer from another IRA (Roth conversion) and direct them to fund my LLC. And once a year I send them an LLC valuation.

The custodian firms are pretty opaque.  Who knows who is running them, etc.?

@Dmitriy Fomichenko 

Thanks for posting that article.  Very informative as so many of your posts are.

[Dawn Anastasi]

I like the idea of the Solo 401k where you have your money where you see it.

[Doreen Chaisson]

There are many Self-Directed IRA custodians out there. It is advisable to do your due diligence and ask about such things as how long have they been in business, are alternative assets their sole focus, are they BBB accredited and rated, and most importantly, are they a regulated financial institution and have they ever been sanctioned by any regulatory bodies. It might be helpful to know how many accounts and how much in assets do they administer, and so forth. Any regulated bank providing IRA administrative and custodial services will provide FDIC insurance on uninvested cash in your account.

What often gets overlooked is the type of company you are choosing. IRA providers can be put into three separate categories: Custodians, Administrators, and Facilitators.

Custodians are the first type of company, and are usually the most common. They're either a bank, credit union, or non-bank custodian approved by the IRS (usually a broker dealer who obtains IRA approval). Custodians are permitted to custody assets held in an IRA under IRC Section 408. They're also subject to strict regulatory oversight at a State or Federal level. Custodians tend to take a more conservative approach when reviewing alternative assets for investment, as they want to avoid the custody of any assets that may be involved in prohibited transactions. Alternative Asset custodians cannot give any tax, legal or investment advice, cannot assist with the structure of an investment, and cannot endorse, promote or align with specific investment sponsors.

Administrators are the next type of company. Essentially anyone can be an administrator, and their main function is to perform administrative functions only. Because of this, they also need to have an identified custodian for the self-directed IRA named in the account disclosure documents. Administrators are only subject to regulation if required due to profession (CPA or attorney), not for role as administrator. This allows administrators to be much more liberal in accepting assets and allows the ability to align with investment sponsors. Review fee schedules carefully – there may be separate charges for whatever 3rd party custodian they are using.

The third company type is a Facilitator. They educate investors on the process of self-directed investing or assist in setting up single-member LLCs for either "check-book control" or to purchase a franchise or ROBS (Roll-Over Business Startup). They may also provide administrative services for the LLC. Like Administrators, Facilitators must have an identified custodian for the self-directed IRA and are only subject to oversight on a professional level. They are also much more liberal in accepting assets and can align with investment sponsors. Again, review fee schedules carefully – there may be separate charges for whatever 3rd party custodian and/or administrator they are using.

So when you're looking for someone who offers a self-directed IRA, make sure you know the type of company you're dealing with.

[Jaime Raskulinecz]

@Dmitriy Fomichenko The article you posted was from 2012 and didn't have anything to do with either company absconding with client funds. Some clients, who don't do their due diligence on an investment, will try to get compensated for their investment losses by suing their SD IRA provider. As we all know, in the self directed world we don't give advice or vet any investments.

I don't know any company that doesn't provide FDIC insurance on client cash not invested, even if it is only up to the $250,000 maximum. Due to the way we place client cash in multiple banks, we offer more than that for our clients.

Some people handle checkbook control and Solo k responsibilities as they are intimately familiar with the rules. That strategy is certainly NOT for everyone. We see a lot of prohibited transactions that take place in those scenarios because people are not fully informed.

Be careful out there folks. The main thing you should be worried about, after due diligence on any investment you want to make, is maintaining the tax advantaged status of your account. 

[Dmitriy Fomichenko]

Good summary @Doreen Chaisson and good advice about due diligence!

@Jaime Raskulinecz I agree with you about the FDIC insurance and the split between different banks to provide protection beyond $250K, while this would not be applicable to most people. Who would want to keep $250K+ cash in his SD IRA? Perhaps only for short period of time. This is the point in setting up SD IRA to get those funds invested. And I'm sure APS clients had their cash insured by FDIC, but that didn't help Andy :-(

And yes, checkbook control is not for irresponsible people. However, you don't have to know every rule to have checkbook control, but you must be willing to ask before you get into investment. And experienced facilitator, custodian or administrator will provide the guidance to a client when they seek help. Plus access to such a great community as BiggerPockets where you can find answers and guidance. 

People also need to realize that having a custodian will not take the responsibility off of them for a prohibited transaction. Regardless which option is chosen (custodian or checkbook control), client is ultimately responsible for the transactions in his or her retirement account. 

[Loren Whitney]

I know we've already had a little back and forth in private messages but I wanted to add a public statement as well.

Given what you are looking for, a couple of items come to mind. First, with regard to avoiding future problems with an IRA provider, you might ask if the custodial entity is experienced handling IRAs with alternative assets in them as well as the cash that flows in and out of that type of account. Some custodians have more extensive experience than others, and because the custodian is an entity that deals with the integrity of the account, it makes sense to look for one who is good at it. You can even ask questions like "how often are cash balances reconciled?" This might sound like common sense but what I'm really trying to say is don't be afraid of asking sophisticated questions when performing future due diligence on custodians.

Second, your thought about simplicity makes a lot of sense. Some providers have features that are designed to make it easier for IRA real estate investors: features like free online bill pay or the ability for your IRA's renters to pay their rent electronically. If you can find a provider that makes it easy enough for you, it may influence your decision about whether you want checkbook control. The criteria for whether to choose checkbook control is often a mix of convenience, IRA provider fees, IRA provider educational support, and risk tolerance.  To some extent, the decision also has to do with what assets your account is into.  It is surprising that some account holders don’t take into account the specifics of their investments when choosing a provider or choosing whether to use checkbook control.