A self-directed IRA can provide you with a level of control and asset diversity that isn’t available in more traditional IRA accounts.
Although you may determine when, what, and how you invest your funds in a self-directed IRA, that doesn’t mean you’re on your own.
Self-directed IRA custodians play an essential role in self-directed IRA accounts. And though their role is generally considered passive—you’re responsible for investment decisions and due diligence—choosing the right one is paramount to success.
Do I Need a Self-Directed IRA Custodian?
All IRAs, self-directed or otherwise, require a custodian. Custodians are financial organizations that hold your account and ensure that it adheres to all government regulations.
Custodians generally make up banks, brokers, or other financial organizations that play an active role in account management for basic IRA accounts. In some cases, these entities may allow investors to pick which stocks, bonds, or mutual funds make up their portfolio, but even that decision-making level doesn’t match the autonomy of a self-directed IRA.
On the contrary, self-directed IRA (SDIRA) custodians are trust companies that oversee the administration of your account, but not the actual investment decisions. Self-directed IRAs are similar to individual 401Ks that allow plan owners to make investment decisions.
SDIRA custodians must be approved by the IRS and generally specialize in alternative investment opportunities, like real estate, cryptocurrencies, and other alternative investments popular among SDIRA investors. Since many traditional IRA accounts don’t specialize in these investments, many people turn to SDIRAs and SDIRA custodians for their investment needs.
What Are the Benefits of Hiring a Self-Directed IRA Custodian?
All IRA accounts need a custodian, but hiring a self-directed IRA custodian is more than checking off a box. Custodians can also provide several other benefits, including:
- Freedom to make your own investment choices
- Access to a diverse portfolio of assets not available under traditional types of IRAs or other retirement accounts
- Assurance that you comply with government regulations and that your account remains at a tax advantage
- Help adhering to contribution limits and assisting you in resolving excessive contributions and limiting any potential consequences
- Acting as a third-party executing investments deals on your behalf
- Providing tools and resources required for transactions and ongoing account management and administrative processes.
Can My Bank or Brokerage Firm Act As a Self-Directed IRA Custodian?
There are no rules that ban a brokerage firm from acting as a custodian, but most well-known investment brokerages don’t offer true self-directed IRA accounts. The same is true for many banks. In some cases, those financial organizations will allow investors to choose the stocks, bonds, or mutual funds they want to invest in, but options are typically limited to the organization’s portfolio.
True SDIRAs are mostly managed by trust companies and make it possible for investors to choose from a range of alternative assets, including cryptocurrencies, promissory notes, and real property.
Do Self-Directed IRA Custodians Provide Investment Advice?
No, an SDIRA custodian is a passive entity that acts as a third party between you and eligible investment opportunities. Therefore, they will not advise you on how, where, or where to invest your funds. Instead, they hold your accounts, ensure that those accounts adhere to federal requirements, and provide you with the tools and resources necessary to manage your own investments.
How Much Are Self-Directed IRA Custodian Fees?
Self-directed IRA custodian fees vary by company and are important to consider when evaluating custodians. Generally, custodian fees fall into three categories:
- Flat fees. Annual fees are applied regardless of how many assets make up your portfolio.
- Total asset value fees: Fees applied to a group of assets that fall into the same category. Although categories can vary, custodians typically group assets into 4 to 5 specific types. Therefore, you may pay a different fee for each asset group under this fee structure.
- Per-asset fees: Fees applied to each asset held in your SDIRA account. Under this type of fee structure, you may pay different fees based on the type of asset.
It’s important to note that other fees may apply. For example, some custodians charge a fee when you set up or close your account or make a transaction. Others may also charge a monthly, bi-annual, or annual service fee.
As you compare trust companies, always make it a point to inquire about their fee schedule. Doing so can help you avoid paying unnecessary or excessive fees.
With that in mind, let’s explore seven critical aspects that should factor into your decision to choose a self-directed IRA custodian.
7 Tips for Finding the Best Self-Directed IRA Custodian
1. Asset Specialization.
One of the most appealing reasons to open an SDIRA is also one of the best ways to begin your search for a suitable custodian: asset selection. SDIRAs allow you to diversify your portfolio by investing in non-traditional assets like real estate, precious metal, livestock, and even liens and promissory notes. However, not all SDIRA custodians are created equal.
Before you select a custodian, consider the type of assets that specialize in and if their expertise and experience match your wealth strategy. For example, a custodian that specializes in your preferred assets type will better understand the federal regulations and industry best practices relevant to your preferred asset.
2. Transaction Speed and Volume.
The number of transactions you can make and the speed at which your custodian can complete them can play a pivotal role in your investment strategy. Transaction delays can lead to missed opportunities. The same is true if your custodian places unnecessary restrictions on the number of transactions you can complete in a given time period.
Always inquire about transaction speed and volume limits as you search for a custodian. Make sure it aligns with your investment goals and asset preference. Some custodians can process transactions in as little as two days, giving you the speed and agility to manage your portfolio and take advantage of investment opportunities as they become available.
3. Standard Fees.
All SDIRA custodians charge fees, but those fees aren’t the same. A fee schedule that is unnecessarily high or simply doesn’t fit your investment strategy can negatively impact your returns.
Remember that there are different ways a custodian may apply fees (e.g., per asset, total asset, or flat fees). In addition, depending on the amount and type of assets you plan to hold in your account, some fee structures may be more advantageous than others.
Be sure to compare fees with other perks in order to determine which custodian provides you with the best return on your investment.
4. Miscellaneous or Additional Fees.
Standard fees are par for the course, but SDIRAs also come with miscellaneous fees that may apply under certain circumstances or as part of specific administrative processes like wiring funds or processing and storing documents.
Much like standard fees, miscellaneous fees will impact your total revenue. When vetting a custodian, inquire about any additional fees that you may need to pay in addition to the standard fees. Always consider how these fees will (or won’t) apply to your preferred asset investment strategy.
5. Investment Restrictions.
SDIRAs let you tap into various investment channels that aren’t available under more traditional IRA structures, but that doesn’t mean everything is fair game. For example, the IRS prohibits several types of transactions, including collectibles (e.g., antiques, rugs, stamps, etc.), alcoholic beverages, and life insurance.
There are also limitations as to how you can use your funds. For instance, you can’t use funds to buy property for personal use. A reputable custodian will be fully knowledgeable in federal restrictions and remain up-to-date on any industry or regulatory changes.
However, IRS restrictions may not be the only ones you need to be concerned about. For example, some custodians place their own restrictions on how and where you can invest your funds. That’s not to suggest a company that has its own list of prohibited transactions isn’t worth your time, but it does mean you need to identify and understand the implications of any restrictions.
SDIRA custodians may take a passive role in your investment decisions, but that doesn’t mean having the lowest fees or most diverse asset selection make them the best custodian for you. SDIRA investments can be quick-moving, complex, and vulnerable to quickly changing requirements, rules, and economic environments.
For that reason, choose an SDIRA custodian who has the experience necessary to hold your account and guide you through the intricacies and nuances of alternative asset investments.
7. Customer Service.
The final factor to consider is how you feel as a client. SDIRA’s are a long-term investment vehicle that you’ll likely manage for the rest of your life. Therefore, the custodian you choose should be quick to respond and available to field questions. When all things are equal, the best custodian is one that instills confidence in what can be a life-long, lucrative partnership.
Horizon Trust is an IRS-approved custodian that provides the asset diversification you need to control your future and grow wealth. We are an independent trust company that caters to numerous self-directed investment opportunities, including traditional and Roth IRAs, SEP IRAs, HSAs, CESAs, and individual 401ks. Our team of financial experts can help you at every point of your investment journey, from setting up your SDIRA account to managing investment complexities across a wide range of alternative assets.
Ready to take the next step in your investment journey? Contact Horizon Trust today and we can walk you through SDIRA setup and management processes, give you an overview of the resources and tools you gain by partnering with Horizon Trust, and help you plan for retirement.