How To Choose a Self Directed IRA Custodian
Choosing the best Self Directed IRA Custodian is essential for the success of your retirement investing. However, what qualifies as the “best” can differ based on a number of factors. Let’s start off by discussing what a Self Directed IRA Custodian is and then we’ll explore the elements to consider when making a choice.
What is a Self Directed IRA Custodian?
The IRS requires retirement accounts to be held by a custodial account or a trust. Banks naturally qualify as a trust and that is why almost all banks are able to offer retirement products. However, a Custodian doesn’t have to be a bank, and that is what allows the Self Directed IRA to exist. Standard banks and Custodians don’t allow for self-directed investing in alternative assets (like real estate.) In order to facilitate investing in these kinds of assets, specialized Self Directed IRA Custodians were established. These are institutions that fulfill IRS requirements for nonbank custodians including:
- Fiduciary continuity
- Established location
- Fitness to handle funds
- Fiduciary experience
- Financial responsibility (i.e. a high degree of solvency)
- Capacity to account
- Established rules of fiduciary conduct
- Minimum net worth
How to choose the best Self Directed IRA Custodian
The best choice for a Self Directed IRA Custodian will depend on what kind of assets the investor would like to purchase. Custodians differ greatly in the functionality they offer and the right functionality is key for specific investments. Here are some of the different services that Self Directed IRA Custodians offer their account holders.
How much are Self Directed IRA Custodian fees?
Each Self Directed IRA Custodian can use a unique fee schedule and the only way to find out the fees for each is to make individual queries. The possible fees that can be charged by a Self Directed IRA Custodian include:
- Setup – A one time fee to cover the initial setup.
- Administrative – A series of differing fees that cover administrative functioning like processing rollovers.
- Transaction – A series of fees that are applied for every requested transaction (e.g. purchasing an asset).
- Asset-based – A fee charged to the account based on the overall value of the account.
- Annual maintenance – A fee charged annually or quarterly to maintain the IRA account.
- Asset markup – A fee charged by the Self Directed IRA Custodian when pricing the specific asset.
What kind of Self Directed IRA Custodian is best for real estate?
It depends on the nature of the real estate investment. For the purpose of choosing a Self Directed IRA Custodian, we can break down real estate investments into two major categories. The first is a real estate investment that is hands-off. This is where the investor contributes funds but a third party handles the management and business side of the investment. Examples of these include REITs (real estate investment trusts) and private placements. Since involvement in these kind of investments does not require any kind of transactions from the account holder, the classic Self Directed Custodian is the best fit. The account holder will be responsible for an inexpensive setup fee, light administrative fees, and the Custodian’s annual account fee. Due to the nature of the investment, though, they will be able to avoid expensive transaction fees.
The second category of real estate investment is that which involves active management. This can include rehabs, fix-and-flips, and rental units. For these kinds of investments, the Self Directed IRA Custodian with checkbook control is the better fit. The reason for this is that these kind of real estate assets require numerous transactions. Every contractor payment, deposited check, and maintenance action counts as another transaction. With a classic Self Directed IRA Custodian, the fees to handle these transactions can quickly become overwhelming. However, a Self Directed IRA Custodian that offers checkbook control does not charge any transaction fees. The setup may be a little bit more expensive, but it will quickly pay for itself.
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