What is a Self-Directed IRA Custodian?
After the 2008 financial crisis, alternative asset investments have grown in popularity. As a result, Self-Directed IRA custodians are becoming a popular provider to legally handle investments. In this article, we explain why it’s important to use a Self-Directed IRA custodian over a traditional investment company. Also, we explain the advantage of using a Self-Directed IRA LLC.
Alternative Investments with a Traditional IRA Custodian
If you have an IRA (individual retirement account), you must have a custodian. Pursuant to section 408 of the Internal Revenue Code, a bank (Wells Fargo), financial institution (Vanguard) or authorized trust company (IRA Financial Trust) must establish and administer your IRA.
However, not all IRA custodians allow the IRA to invest in alternative assets, such as real estate. It’s not in the financial interests of traditional institutional investment companies, like Bank of America or Wells Fargo, to encourage you to make alternative asset investments. They don’t make money that way. They do, however, make money when you invest in their financial products (traditional investments).
Choose a Self-Directed IRA Custodian
The majority of Self-Directed IRA custodians are non-bank trust companies. The Self-Directed IRA custodian or trust company often has a banking relationship with a bank that holds the IRA funds in a special account. This account is known as an “omnibus account.” It offers Self-Directed IRA clients with FDIC protection of IRA funds up to $250,000 in the account.
For example, IRA Financial Trust is a non-banking IRA custodian. IRA Financial Trust partners with Northern Trust, a private bank, to offer a safe and secure way to make Self-Directed IRA investments.
Primary Roles and Responsibilities of a Self-Directed IRA custodian
- Holds and custodies IRA and 401(k) plan assets
- Subject to state regulation by the state division of banking
- Performance of administrative recordkeeping regarding the Self-Directed IRA
- Performs administrative reviews of the Self-Directed IRA assets
- Assists in opening & funding your IRA account
- Makes the investment(s) on your behalf
- Distributes and pays expenses per your request
- Provides you with quarterly statements
- Answers questions about your account and their procedures
- Reports information required by the IRS and other governmental agencies
- IRS Form 1099R – Distributions from your IRA
- IRS Form 5498 – Contributions to and Fair Market Value of your IRA
An IRA custodian is the preferable choice in comparison to an IRA administrator.
IRA administrators are not subject to any IRS or state audit or reviews. Therefore, they are not subject to ongoing oversight, especially in the area of prohibited transactions, which is important in order to keep your Self-Directed IRA in full IRS compliance.
Whereas, an IRA custodian is subject to quarterly state banking division audits and reviews, as well as IRS audits. As a result, this keeps your IRA safe from prohibited transactions and fraud.
What is a Self-Directed IRA LLC?
A Self-Directed IRA LLC is a type of IRA that allows the IRA holder (you) to gain control over your retirement funds. When you have control, you can self-direct the investments you want to make, using your retirement funds.
If you choose a traditional Self-Directed IRA, you must direct the IRA custodian to make investments you wish to make with your retirement funds. This often triggers high custodian fees and transaction delays.
On the other hand, with a Self-Directed IRA LLC with Checkbook Control, you are the IRA LLC manager. In other words, you have the ability to make traditional investments (stocks, mutual funds, etc.) as well as non-traditional investments (real-estate, precious metals, etc.). This is tax-free and without custodian consent. Additionally, there are no account value and transaction fees with a Self-Directed IRA LLC.
The following are a number of other benefits with using a Self-Directed IRA LLC:
- Invest and real-estate and much more tax-free: You can invest in almost any type of investment opportunity.
- Reduce custodian fees: You’re in a position to save a significant amount of money on custodian fees.
- Tax-Deferral: Because an LLC is treated as a pass-through entity for federal income tax purposes, and the IRA is a tax-exempt party, all income and gains will generally flow through to the IRA tax-free.
The Self-Directed IRA LLC allows the IRA holder to:
- Better protect their retirement assets from a falling stock market or against the risk of U.S. inflation.
- Use the same Self-Directed IRA LLC to purchase domestic and foreign real estate, private mortgages, gold and stocks, bonds and mutual funds inside the same plan and generate profits tax-free.
- Purchase real estate foreclosures and tax liens on the spot, or make personal loans by simply writing a check.
- Buy your retirement home or vacation property now at today’s prices, rent it out, and then move in at the age of 59 1/2.
- Diversify your retirement portfolio and invest in almost any type of investment tax-free.
- Take control of your retirement funds and hold them at a local bank or credit union.
- Shield your retirement assets from creditors or bankruptcy.
Self-Directed IRA LLC with IRA Financial Group
With IRA Financial Group’s Self-Directed IRA LLC, you have control to make any approved investment without an IRA custodian. Since all your IRA funds are in a local bank in the name of the Self-Directed IRA LLC, you only need to write a check straight from the IRA LLC account or wire the funds from the IRA LLC bank account to make an investment.
The IRA Financial Group will take care of the entire setup of your Self-Directed IRA LLC structure. We can handle the process by phone, email, fax or mail. It typically takes between 7-21 business days to complete. However, this timing is largely dependent on the state of the LLC formation and the custodian currently holding your retirement funds.
Our IRA experts and tax and ERISA professionals are on-site to reduce setup time and cost. More importantly, each client of the IRA Financial Group receives a retirement tax professional to help with the establishment of the Self-Directed IRA LLC structure.
Get in Touch
Do you have a question regarding Self-Directed IRA custodians or the Self-Directed IRA LLC that we didn’t cover in the article? Contact IRA Financial Group at 800-472-0646. Or fill out the form to speak with an IRA specialist.