A Guide to Choosing a Self-Directed IRA Provider

Chances are, you’ve been hearing about self-directed individual retirement accounts ever since you started investing in real estate. On the surface, self-directed IRAs seem cumbersome and complex. When tax rates are low, self-directed IRAs may not seem worth the trouble. But any rise in the personal income tax rate or capital gains rate can cause many investors to give self-directed IRAs a closer look.

Investors usually start by searching the Web. So much information, so many opinions and, as one of my lawyer friends says, “I can go to the Web and find data to support the conclusion I want.”

So you dig a little deeper, talk to your advisers and friends. My suspicion is that the information you get from them is of better quality but still not quite the depth you need.

Next, as we have all done in the real estate world, you attend a seminar or two. These tend to be more about sales than substance, but again, you gain a little more knowledge.

The first step in investing with a self-directed IRA is choosing a provider. For the purposes of this discussion, a provider is an entity or group of entities that includes custodial and possibly administrative services.

The choice of provider is probably the most important decision in the process because you want this to be a long-term relationship. You want to be able to rely on your provider to complete your transactions efficiently and as seamlessly as possible. After all, real estate is complicated enough without having another hurdle to jump over. You want the provider to ensure that you’re in compliance with all of the relevant IRA rules and regulations (especially since this is their primary function) and to report required data to the Internal Revenue Service regarding your account.

In choosing your provider, you’ll need to determine the level of services required, gain an understanding of what the provider’s transaction process is and inquire about the provider’s customer service as well as understand the fee structure.

Your real estate investment should be the driver to determine the level of service you’ll need. You want to keep in mind your real estate strategy, including purchase, holding period, any asset maintenance and exit strategy.

If you plan to invest in a private placement, you may only need custodial services. On the other hand, if your investment is a rehab project, you’ll need a higher level of administrative services.

If you are new to self-direction, start with something you know. If you like buy-and-hold, don’t make your first self-directed IRA investment a rehab project. As one of my associates says, “Self-direction is the most complicated easy thing you’ll ever do.”

Also, real estate investors tend to be entrepreneurial, independent self-starters. With self-direction, others need to be involved to some degree, so be prepared.

Now that you’ve assessed the level of service you’ll need, you need to gain an understanding of your prospective provider’s transaction process. Call your prospective provider and ask, “What is the process to purchase real estate?” This might seem like a simple question, but be sure you get a detailed answer. First, understand that real estate investors are not the only investors utilizing self-directed IRAs, and the process and paperwork is different for purchasing gold bullion, for instance, than it is for real estate. Also vague, short or hurried answers should tell you that maybe that provider is not for you.

Again, going back to your intended investment, choose a provider that seems to be a good fit for you. If your investment is rather simple, then you probably won’t need a lot of hand-holding, so a provider that is more along the lines of an order-taker might be satisfactory. If, on the other hand, your transactions tend to involve many parties or are time-sensitive, a provider that is involved at the beginning of your transaction will be better than one that only wants final documents.

Next, you should assess the customer service departments of your prospective providers. These are the people with whom you will be spending the bulk of your time. Apart from the obvious technical competence, what else are you looking for? The provider you choose should add value to your investment team. Talking with existing clients of prospective providers will be insightful and invaluable.

You should also bypass the marketing department and call the customer service line directly, as if you are an existing client with a real estate purchase.

• Do you wait on hold? If so, how long?

• Do you get to speak with the same customer rep for follow-up?

• Do you have to re-explain issues?

If your investment is simple or doesn’t require a lot of ongoing maintenance, a lower level of responsiveness may be satisfactory. If your investment requires a fair amount of maintenance (rental property or rehabs) then you will need a provider with a higher level of responsiveness. If you’ll need guidance on the rules governing IRAs, then good customer service will be essential.

Lastly, compare cost. Although you do not want to overpay, remember you do get what you pay for. You should consider all fees you will pay each year for your investment (from purchase to sale). Ask your prospective providers to give you a detailed estimate of fees for each year of your investment. Don’t just look at websites.

Beware of marketing material that makes comparisons based on short or unusual time frames.  You should ask if custodial fees are billed separately from administrative fees, when these fees are charged and what exactly is covered by administrative fees. For instance, is there a separate charge to sign documents, incoming funds or check fees? (If you go the checkbook IRA route, don’t forget about state registration and resident agent fees.) Ask your prospective provider if all the fees are listed in one place. You want to able to see all the possible fees and services you may need.

In selecting your provider, keep in mind that you are purchasing services, not a commodity. In real estate, you are trying to build your team. The provider should add value to your team. If you are getting conflicting information from your team (lawyer, CPA, etc.) your provider should be willing to discuss issues with them. If a provider’s level of service is less than you need, there will be delays, and this will cost you money and maybe investments.

All providers should be able to tell you about permissible investments and prohibited transactions, but the best providers will be able (and willing) to tell you about the structure of investments and contrast those investment purchases in retirement plans versus outside of retirement plans.

Remember, however, that self-directed IRA providers are not your advisers. They will not comment as to whether an investment is “good.” A self-directed IRA is a sophisticated investment model and a powerful tool for building your wealth. Be sure to choose a provider that is in sync with your investment model and is a good fit for you.

  • Jack Kiley

    John “Jack” F. Kiley is a Certified Public Accountant (CPA) and Certified IRA Services Professional (CISP). He is Managing Partner in MidAtlantic IRA, LLC, and John Kiley CPA, LLC. Kiley has extensive knowledge in developing tax, retirement and financial planning strategies for high-net-worth individuals and closely held businesses. 240-575-3880 www.midatlanticira.com

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