IRA Custodial Fees – The Law
If you have an individual retirement account (IRA), you may notice various fees on your statement. These are IRA custodial fees, which you receive simply by having an IRA. Internal Revenue Code (IRC) Section 408 states that you must establish your IRA with:
- Financial Institutions
- Authorized trust companies
However, there’s a difference between these institutions/IRA custodians. Not all custodians will allow your IRA to invest in alternative assets, like real estate and precious metals. In order to use your IRA funds to make such investments, you will need to establish your account with a self-directed IRA custodian.
Understanding Self-Directed IRA Custodial Fees
Over the last several years, the fees for establishing and maintaining a self-directed IRA account have become more cost-efficient. Fees vary depending on the IRA custodian you choose, and the type of self-directed IRA you establish (custodian controlled vs. checkbook control IRA).
IRA Fees for Custodian Control
If you wish to establish a self-directed IRA, you may know that the custodian controlled structure:
- Requires a special IRA custodian who serves as the custodian of the IRA
- Allows you to make alternative asset investments
- Invests the IRA funds at your sole direction
- Holds investments in the name of the IRA custodian – ex., IRA Financial Trust Company FBO John Doe IRA
- Is responsible for making all payments regarding the IRA investment, including paying for expenses
The self-directed IRA with custodian control is the most common type of self-directed IRA for passive investment funds.
The fees for establishing a custodian self-directed IRA are quite reasonable. Fees generally are about $350-$500 annually. This includes some nominal transaction fees. For example, issuing checks. Most of the best self-directed IRA custodians do not charge an asset value fee.
IRA Fees for Checkbook Control
A self-directed IRA with checkbook control has become the most popular type of self-directed IRA. You may know that an IRA with checkbook control:
- Requires a special purpose limited liability company (LLC) that the IRA owns and IRA holder manages
- Allows you (IRA holder) to make investment decisions on behalf of your IRA – no custodian consent required
Since you need an LLC to establish a “checkbook control” self-directed IRA, the set-up fee is generally around $1,200. The annual IRA custodian fee is generally quite low, such as $180 per year with no transaction fees since the IRA custodian is not really involved in the operations of the IRA LLC. In addition, many of the most reputable self-directed IRA custodians do not include any asset valuation fees.
IRA Custodial Fees vs. IRA Transaction Fees
A self-directed IRA custodian does not earn any fees from selling investments, such as Fidelity. Therefore, a self-directed IRA custodian has a different fee model.
Two Types of Self-Directed IRA Custodian Fees
In general, a self-directed IRA custodian has two ways of imposing fees:
- Annual custodian fee – a flat fee or based on the value of your self-directed IRA as of December 31
- Self-directed IRA transaction fees
1. Annual IRA custodian fees
A self-directed IRA custodian does not sell investment products. Additionally, the custodian does not offer investment advice. The primary manner in which a self-directed IRA custodian can earn fees is for annual IRA administration. You generally pay the fee so the self-directed IRA custodian can perform necessary services, including:
- Administrative recordkeeping regarding the self-directed IRA
- Assists in opening & funding your IRA account
- Makes the investment(s) on your behalf
- Makes distributions & pays expenses per your request
- Answers questions about your account and their procedures
- Reports information required by the IRS and other governmental agencies
The industry trend for a self-directed IRA custodian is to charge a flat annual fee for the administration of the self-directed IRA. However, several IRA custodians impose an annual IRA custodial fee based on the fair market value of the self-directed IRA, as of December 31.
For example, assume your self-directed IRA is valued from $100,000 t0 $199,999. You pay one fee, however, that fee increases if the self-directed IRA value increases above $200,000.
The issue with asset valuation based fees is that it incentivizes clients to undervalue their self-directed IRA assets. This is because the IRA custodian is directly tied to the value of the retirement account.
A consequence of this is, some clients may be undervaluing their IRA. As a result, this can create potential IRA issues, especially the case for required minimum distributions (RMDs).
2. IRA Transaction Fees
If you establish a custodian-controlled self-directed IRA (no LLC), it’s common to be charged transaction fees. Transaction fees includes processing checks, or sending wires. You may question why these fees exist. The bank charges the IRA custodian fees for issuing checks, or sending wires. The IRA custodian simply passes the cost of these fees to client.
Additionally, processing a self-directed IRA transaction requires the skill of an IRA specialist. In fact, the process is quite detail oriented. However, self-directed IRA custodian transaction fees are fairly inexpensive.
For investors who have concerns about a high volume of transaction fees, the better solution is the self-directed IRA with checkbook control.
With checkbook control, an LLC is established, and as manager of the LLC, you can make investment decisions regarding the IRA with custodian consent. Therefore, you will not incur IRA custodian fees.
Are IRA Custodial Fees Avoidable?
Unfortunately, due to the IRA tax code, you must establish the IRA with a bank, financial institution or authorized trust company. As a result, you will have to pay fees to establish and administer the IRA. These institutions may differ, but one thing is the same: they must charge fees to stay in business.
Tax Deduction for IRA Custodial Fees
In December of 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA). The TCJA had a significant impact on many areas of the tax code. For example, it reduced the corporation and passthrough tax rates. More specifically, the TCJA increased the Standard Deduction and eliminated the ability of individuals to deduct Section 212 expenses, “temporarily” suspending all miscellaneous itemized deductions through 2025.
As a result, payment of IRA custodial fees or trustee fees are not tax-deductible.
Get in Touch
If you still have questions regarding IRA custodial fees, or if you would like to know more about checkbook control and custodian control self-directed IRAs, contact IRA financial directly at 800-472-0646. Or fill out the form to speak with an on-site IRA specialist who can answer all of your questions in a timely manner.