Newspapers, magazines, the internet, it seems that everywhere you turn nowadays someone is talking about using the services of a self directed IRA custodian. Why all of the sudden is there all this hoopla? Is this something you should be thinking about doing?
The purpose of this article is to put some issues on the table for your consideration. Deciding whether or not to move from a traditional custodian whom advises you on your IRA investments to, a custodian where you decide what type of investment is a personal decision which should be based on how much risk your stomach can take, how much time before you retire and how much money you have now?
First of all, is this some new idea that the real estate investment Guru’s have decided to promote? The fact is, since the late 80′s IRA owners have been able to personally select and direct the investments of their account. So, why is there all this excitement now?
Think about it for a moment.years ago when the economy followed a fairly predictable pattern so, did the financial markets. You trusted the advice of your stock broker and bought most of whatever he/she suggested and were satisfied with the rate of return.
Then along came the dot come era when it seemed that you couldn’t go wrong no matter what you invested in. People came to expect double digit returns as a normal way of life. Unfortunately the realization that there were no solid numbers in the valuation of these investments came too little, too late for countless families. IRA accounts lost hundreds of billions of dollars seemingly overnight.
Was it over? No, IRA accounts continued to be pummeled by circumstances no one could control. 911, corporate accounting scandals costing investors tens of billions of dollars, plunging interest rates, and now the sub prime mortgage scandal.
Today the threat of not having enough money to fulfill their retirement dreams has become all too real for the ‘boomer” generation. People began demanding answers and solutions from their financial professionals oftentimes without satisfaction. There is now a massive wave of people realizing that they have no choice but to “get involved” in managing their IRA nest egg. No longer can they sit idly by and trust someone else to determine whether they retire to the house on the hill or the shack by the tracks.
So there you have it, the reason every one seems to be talking about directing their IRA investments. To help you make that decision, the following are the pluses and minuses of the three types of self directed IRA custodians.choose wisely.
Option number one: You can select a self directed IRA account from a major bank or brokerage company. These types of accounts in many cases are not a “true” self directed IRA account. Basically they provide a buffet of traditional investments (stocks, bonds, mutual funds, REITs) which they then allow you to select from. Of course, for everything they offer they receive compensation. Now there is nothing wrong with this as they are in the business of making money.
The problem arises when you want to invest in something they don’t offer then you are simply out of luck. Worse yet some brokers may claim you can’t invest your IRA monies into certain types of “alternative” investments for example; real estate.
Plus: Major companies provide virtually everything you want to choose from when it comes to traditional investments. The company may also provide a limited level of advice to guide your decisions.
Minus: Should you want to diversify into “alternative” investments the answer is “NO” or worse yet, inaccurate advice. The standard procedure for most companies is to have a broker contact you with their goal being to “conserve” your account by talking you out of a “bad idea”.
Option number two: A “true” self directed IRA custodian is a bank or trust company that offers no investment’s whatsoever. Their business model involves charging fees for opening the account, fees for maintaining the account and fees for any investment activity within the account.
You have the responsibility to research and choose the investments for your IRA. Upon your written direction the custodian will then purchase those investments on behalf of your IRA account. The same process occurs when you decide to liquidate an investment they will do so and for each action charge a fee.
A “true” self directed custodian does not offer any advice as to the appropriateness of any investment. This type of custodian allows an IRA owner to diversify into “alternative” investments such as real estate, new business start ups, partnerships, etc.
However, interestingly enough they can refuse to purchase an investment if they do not understand it.
Plus: True flexibility for the IRA owner to diversify into both traditional and non-traditional investments. This allows the IRA owner to take their time researching opportunities and make a decision without having to deal with a broker trying to “sell” them something.
Minus: The first area of concern is obviously the fee schedule. You will need to be very thorough in comparing the different custodians.
A flat fee custodian will have a schedule that discloses the exact fee for each service performed. If you do not see a service listed clarify the exact cost preferably in an email from the customer service department.
An asset based fee custodian will have a blend of fee structures. The basic services such as opening an account, wiring money, liquidating an asset, will have the flat fee listed. However, they may also charge an annual percentage of the value of the account, for example.05%.
This can create not only a heavy load on the performance of the investment portfolio but may also complicate matters. An all too common issue is, how does the custodian value real estate held in the IRA? Do they require an annual appraisal to support your estimation?
There is another challenge involving real estate that more and more people are running into with their custodian. The impasse may result from the IRA custodian not having experience with let’s say, fix and flip properties. In that event you could have quite a surprise when the custodian refuses to purchase the property for your IRA.
NOTE: Choosing a “true” self directed custodian may require you determining whether or not they will purchase the types of investments you select?
Consulting with people from all over the country I do get an earful of exasperation when it comes to another issue. In view of the fact that the custodian has control of your IRA money, the question becomes, will they move quickly to purchase an investment and just as important pay the bills and invoices promptly?
In view of these challenges you may wonder what type of real estate investments are the most efficient to handle through a “true” self directed custodian? Clients tell me, raw land, building lots, and partnerships. So the qualifier would be any real estate investment that does not have a lot of service work or ongoing bills.
So are you SOL if you want to own rental real estate or fix and flip a house, or provide loans secured by real estate? Fortunately there is one more option.
Option number three: Repositioning your IRA to become a “self controlled” IRA”. What is that you are no doubt asking? There are professional IRA planning firms that specialize in structuring an IRA for the ultimate in control and convenience. Once this process is complete, you the IRA owner will have 100% checkbook control of the IRA monies.
You are not required to nor will you ever ask the custodian for permission to make any investment that you see fit. You simply write the check out of the IRA account and complete the transaction.
As you can imagine this is a godsend to real estate investors in particular. Now you can buy, fix up and sell any property you choose on your timetable not that of some custodian. You can conveniently own rental properties with all the various expenses and repairs paid from the IRA checking account you control. Of course, all the rents or sales profits flow back into the IRA account.
Plus: You have complete control of the IRA account. You can react quickly to any opportunity that presents itself. The custodian does not get involved in the investment process so cannot prohibit you from making an investment that you are comfortable with.
Minus: You have complete control of your IRA account. Decisions as to what your IRA should invest in as well as the responsibility of following specific rules governing IRA’s fall squarely on your shoulders. Therefore, it is crucial that you work with a competent IRA planning firm.
Does this mean that this is the type of IRA planning that everyone should be doing? The answer is probably not. I prefer to see that an individual has some prior experience in the type of investments that they want to make in the IRA or having access to professional advisers to help guide them.
I hope you have enjoyed this brief overview and have found this information helpful as you carefully plan to enjoy the retirement of your dreams.remember,
“Nobody cares about your money like you do”