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How to Choose the Best Self-Directed IRA Custodian

Best Self-Directed IRA Custodian

Choosing the Best Self-Directed IRA Custodian

When considering Self-Directing your retirement account, many people wonder, how to choose the best Self-Directed IRA Custodian.” In this article, we will describe the role of a Self-Directed IRA custodian and identify factors you should consider before selecting a Self-Directed IRA custodian.

What is a Self-Directed IRA Custodian?

Pursuant to IRC Section 408, an IRA (individual retirement account) can only be established and administered by the following institutions, under state law:

  1. A bank
  2. Financial institution
  3. Authorized trust company

An IRA Trustee (custodian) is the institution that administers your retirement account. By law, every IRA must have a custodian or trustee.

Currently, most of the 50 or so million IRAs invest in traditional asset investments. This includes stocks, bonds and mutual funds. However, since the 2008 financial crisis, retirement account investors began to see the advantages of alternative assets, such as real estate. It better diversifies their retirement account investment portfolio, and acts as a hedge against inflation.

Key Points
  • Choosing a custodian is the most important decision when using a Self-Directed IRA
  • The custodian should allow for the types of investments you wish to make
  • Ensure you know all the services they provide before committing

There are certain non-traditional investments that you cannot make, including:

  • Life insurance
  • Collectibles
  • Certain self-dealing and conflict-of-interest transactions under IRC section 4975

Other than that, you can make any type of investment with your IRA.

The majority of banks and financial institutions that offer IRAs only permit their IRA clients to invest in traditional assets because that’s how they earn their fees. The IRA custodian has the right to decide what types of IRS-approved investments it will allow its IRA clients to invest in.

Self-Directed IRA Custodian

On the other hand, a Self-Directed IRA custodian, or passive custodian, allows you to engage in non-traditional investments, like real estate and cryptocurrencies. It also differs from financial institutions in not offering investment advice. Additionally, a Self-Directed IRA custodian does not sell investment products.

So how does a Self-Directed IRA custodian earn its fees? Self-directed IRA custodians earn fees from the custody and administration of IRS-approved alternative asset investments in the IRA, or other retirement plan.

As you can see, to establish an IRA, you will have to open an account at a bank, financial institution, or authorized trust company, like IRA Financial Trust.

Essentially, the IRA custodian is responsible for maintaining and administering the IRA. As a result, it must comply with all IRS reporting requirements surrounding the IRA. This includes filing IRS forms 5498 and 1099-R.

Most IRA holders have an individual retirement account with a bank or financial institution. Therefore, the investments they make are typically traditional investments, such as mutual funds.

When choosing the best Self-Directed IRA custodian, focus on your needs. For example, do you think you will need investment advice? If you work with a bank or financial institution, the IRA custodian could have a fiduciary or “best interest’ responsibility if a registered investment advisor is involved. This means you will receive advice on the investments you make.

Whereas, if you’re an IRA investor who wants to make alternative asset investments with your IRA, the IRA custodian is not considered a fiduciary, as it does not provide any investment advice. Its primary responsibilities include facilitating the transactions based on your direction. Additionally, it provides and takes custody of the IRA’s alternative asset investments.

Therefore, a Self-Directed IRA custodian is not responsible for reviewing the transaction. As a result, you have more responsibility and will need to do your due diligence.

Factors to Consider When Choosing a Self-Directed IRA Custodian

Below is a list of four important factors you should consider regarding the role of a Self-Directed IRA custodian:

1. Open Your IRA with a Passive Custodian

You must open a Self-Directed IRA with a passive custodian, or self-directed IRA custodian that will allow you to make alternative asset investments. The self-directed retirement industry was born to serve the need for retirement investors to make IRS-approved alternative asset investments with their IRA.

The reason for this is not all IRA custodians allow their clients to make alternative investments. Almost all banks and financial institutions that are IRA custodians do not allow their clients to use IRA funds to make alternative asset investments because they do not make money from such investments.

2. Know the Role of a Passive Custodian

As we mentioned earlier, the Self-Directed IRA custodian is not treated as a fiduciary by the U.S. Securities and Exchange Commission (“SEC”). It does not sell investment products or provide any investment advisory services.

Its sole role is to facilitate investments you exclusively direct. In other words, the custodian serves the growing demand from retirement account holders who wish to make IRS-approved alternative asset investments that traditional financial institutions do not offer.

Keep in mind, the Self-Directed IRA custodian is not permitted to offer legal or tax advice.

3. Transaction Fees

It’s important to know the process and fees for your transactions. Is there a fee charged for each transaction? Do I need custodial consent for an investment I choose? If you plan on making several transactions per week, fees might cut into your earnings. However, if you’re only making one or two per year, this might not be a big deal.

The major issue may be the timeliness of the transactions. If you need to wait for consent from your custodian, you may miss out on an investment opportunity. However, if the custodian offers “checkbook control”, no consent is necessary. Therefore, you can make investments whenever you choose.

4. Miscellaneous Fees

There are general fees that your IRA custodian will charge. Some IRA custodians may charge a fee based on your account balance. Others may simply charge a flat fee regardless of the amount of transactions you make, or your account balance.

You should find a custodian that suits your exact needs. More than likely, you may be hit with various miscellaneous fees, as well as account and transaction fees. Again, these fees are based on the custodian that you choose.

Checkbook Control Self-Directed IRA

If you prefer a Self-Directed IRA with checkbook control, make sure the custodian you select has the requisite experience to custody and facilitate such investments.

A checkbook control Self-Directed IRA is an investment solution that involves the IRA being the owner of a special purpose limited liability company (LLC). You, as the IRA holder, will manage the LLC. The limited liability company offers protection regarding your IRA investments.

To Summarize

When choosing the best Self-Directed IRA custodian for you, make sure the custodian can meet your investment goals. You also want a custodian that specializes in alternative asset investments. They have the knowledge and experience to administer a self-directed retirement account.

As previously stated, a Self-Directed IRA is not a fiduciary and is not required to put your best interests first. You must understand the risks of any investment you choose.

Get in Touch

Do you still have questions about choosing the best Self-Directed IRA custodian? Contact IRA Financial Group at 800-472-0646. We’re available to answer all of your questions, and if you choose our services, we can establish your Self-Directed IRA in a matter of days. You can also fill out the form to speak with one of our on-site IRA specialists today.

Did You Know?

The top Self-Directed IRA custodians are a member of Retirement Industry Trust Association, or RITA. This shows a commitment to the industry and continuing education to help our clients.


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