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5 Questions to Ask Your Self-Directed IRA Custodian

Not every self-directed IRA custodian is right for every self-directed investor. Ask these questions before making a decision.

[Updated: Feb 04, 2021 ] Jan 31, 2020 by Carole VanSickle Ellis
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Making the decision to self-direct your own retirement account is simple. Selecting the right self-directed IRA custodian is also pretty straightforward -- at least on the surface. But not every self-directed IRA custodian or administrator is right for every self-directed investor, even if that custodian is a great service provider.

This places self-directed investors in a difficult position. Nearly every investor, self-directed or otherwise, relies on the referral system. After all, if "Bill, the attorney" did a great job setting up a trust for your neighbor, the odds are good he will do a great job setting one up for you as well.

Unfortunately, the same does not necessarily hold true when it comes to your neighbor's retirement account custodian. Even if the two of you hold very similar assets and leverage very similar strategies, you still must do your own due diligence on all of your self-directed individual retirement account professionals based on your own unique investment strategies and preferences.

With this in mind, there are five questions you should ask a self-directed IRA custodian before making them your self-directed IRA custodian:

  1. What assets would you permit me to hold in my account?
  2. Do you work with investors investing in [insert your preferred asset classes here]?
  3. How quickly can you respond to requests for capital or other account actions?
  4. Can I self-direct my Roth IRA with you?
  5. Have you ever done a deal with one of your account holders?

These questions will help you determine whether the company in question is the right fit for the way you hope to manage the capital in your retirement savings account.

Remember, an account custodian is not the same thing as a financial advisor, so it's not reasonable to ask your potential custodian for advice on your preferred investment options. These questions are solely intended to help you determine whether the company will be able to facilitate your directions in the event you wish to place capital in alternative investments like real estate, private loans, business equity, and intellectual capital.

1. What assets would you permit me to hold in my account?

You need to know going into this interview process that self-directed IRAs are technically identical to more conventional IRAs because the IRS does not distinguish between self-directed IRAs, which can hold almost any type of asset, and "captive" IRAs, which can only hold certain assets determined by the IRA custodian or administrator. In the law that created the IRA, 26 U.S. Code 408, terms like "self-directed," "captive," and "conventional" may not be found at all. These terms have emerged to enable self-directed investors to distinguish between different types of IRA custodians.

If you wish to direct your retirement yourself, then you need a custodian who responds to this question with an answer that goes something like this:

"You can hold anything in your account except life insurance and collectibles, as long as you are not working with a disqualified person or party or committing a prohibited transaction."

Prohibited transactions occur when your IRA does business with or brings benefit to a disqualified person, often yourself or a relative. Self-directed investors must understand how to avoid these transactions because it is not your IRA custodian's job to help you avoid them.

In many cases, a custodian or administrator will tell you they permit only certain types of assets. If you are considering a "gold IRA," for example, then the custodian may only permit you to hold qualified gold and precious metals investments. More often, the custodian will restrict you to certain stocks, bonds, or mutual fund offerings from the company.

They may argue that they are self-directed custodians because you may choose from among various asset offerings on their list of allowable assets, but they are still restricting your individual retirement account by prohibiting alternative investments in asset classes permitted by the IRS. This does not mean a custodial company is, inherently, a bad business, but it does mean they are not a good fit for a self-directed investor.

2. Do you work with investors investing in [insert your preferred asset classes here]?

A self-directed IRA allows you to invest your retirement savings in almost anything, including:

  • Real estate
  • Cryptocurrency
  • Precious metals (with some exceptions)
  • Intellectual property
  • Hedge funds
  • Private equity
  • Tax liens
  • Livestock
  • Heavy machinery
  • Private mortgages
  • Private loans

The list is nearly never-ending. It will probably not surprise you to learn that most IRA custodians do not specialize in every single type of alternative asset that self-directed investors have ever invested in. As you can imagine, a custodian who is very good at facilitating real estate transactions within your account will not necessarily be familiar with cryptocurrency investments or how to purchase a herd of dairy cattle.

Talk to your potential IRA custodian about how they have handled other self-directed investors with your preferred investment strategies to get a feel for their experience and help determine if they are a good fit for you.

3. How quickly can you respond to requests for capital or other account actions?

If you read the fine print in just about any self-directed IRA custodial agreement, you will find information regarding how long a custodian or administrator has to respond to any request for action on their part. In many cases, the window is somewhere between 30 and 90 days.

As you can imagine, that type of delay makes certain types of investing, such as most real estate transactions, nearly impossible to perform. If your IRA custodian has such a window specified in their fine print but assures you they always perform much more quickly, this may be true. Verify it by seeking references and testimonials from other current customers of the company.

In the case of self-directed real estate investments and other specialized investments like cryptocurrency, you will probably need to work with an account custodian who specifically cites these types of expertise in their literature and can back this up with those references and testimonials. Too much will be riding on your ability to elicit timely action from your IRA custodian to risk working with someone who takes every second of the allowed window for response.

4. Can I self-direct my Roth IRA with you?

This is a "gotcha" question. All types of individual retirement accounts, from Roth IRAs to SEP IRAs to traditional IRAs, can be self-directed. However, a custodian who does not know this or does not permit you to self-direct any type of IRA you own is probably not a particularly good fit for you.

5. Have you ever done a deal with one of your account holders?

If the answer to this question is "Yes," then you will probably want to steer clear of this IRA custodian. An IRA custodian is a disqualified person according to the IRS, which means that they cannot work with your self-directed IRA to do a deal because that could bring benefit to a disqualified person. The IRS classifies IRA custodians as IRA fiduciaries because they have "discretionary authority" and "discretionary responsibility in administering the IRA."

There are some IRA custodians out there who actually brag about doing deals with their clients and even bill this as one of the advantages of working with them. While you should consult with a financial advisor and a tax attorney specializing in self-directed IRA law in order to get the final word on this topic, it is generally ill-advised to work with a custodian who does not appear to realize the full definition of "disqualified party."

Converting your captive IRA to a self-directed IRA

Once you have identified a self-directed IRA custodian who seems to be a good fit for you, the time has come to convert your IRA. Your new IRA custodian will work with your current custodian to get the process done, but don't be surprised if the move takes longer than you like. As you probably suspect, many custodians do not like losing their accounts. They may well take advantage of the fine-print "window" we discussed earlier to delay the transfer. If you feel the process is not going as smoothly as it should, you may opt to bring in an attorney specializing in self-directed IRA law to help facilitate the process and make sure your rights as the account holder are respected.

Once you've made the change, the time has come to start self-directing. Work with your IRA custodian to do deals using your retirement savings account and grow your future security in a tax-advantaged environment.

Congratulations! The world of alternative investments is now your oyster.

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