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Questions to Consider When Shopping for a Self-Directed IRA Custodian and Service Provider
If you choose to invest in alternative investments like real estate using funds from an Individual Retirement Account (IRA), you will need to find a directed-trustee or custodian.
Why do you need a directed-trustee or custodian? Stringent SEC and state regulatory requirements generally encourage fee-compensated advisors (including, but not limited to realtors) not to have custody of or direct access to their clients' assets. This is one of the regulatory steps taken to prevent mismanagement. Therefore, most advisors suggest using a directed-trustee or custodian to hold their clients' assets.
Plus, working with a directed-trustee or custodian means you can transfer or rollover money from old employer plans or IRAs held by brokerage or mutual fund firms to an account where you can pick your investments. This means your retirement account with a directed-trustee or custodian will be self-directed, allowing you to be more involved in your retirement decisions and not limited to those narrow options offered by the Wall Street firms. It opens the door to a wider variety of choices including real estate.
There are a limited few trustee or custodians that can process a real estate purchase in a self-directed IRA and these types of transactions in an IRA can be complicated. So it's important that you work with an IRA directed-trustee and custodian that has an extensive understanding of the entire process - someone who knows what to do each step of the way. Asking the right questions before you begin doing business with a company will help ensure you make the best choice of support for your real estate investment in an IRA. Here are some key considerations:
Can the custodian and service provider hold the type of investments I want to buy?
A custodian's service menu can vary greatly, and you will want to get the maximum number of services from a single provider. You should have the option of traditional investment choices like:
If you choose the right directed-trustee or custodian for your retirement account you may be able to invest in a number of alternative investment choices. Some choices that may be available include the following:
What to look for: Make sure a company can provide all of the services of a custodian, retirement account trustee and record keeper under one roof. This might include IRS-approved prototype documents, transaction processing, tax reporting and consolidated statements.
You should look for a company that provides access to a wide range of investment options, including real estate in IRAs, for your portfolios. The great advantage is that besides holding the alternative investments, these directed-custodians can hold all of your traditional investment assets as well. You can consolidate all of your IRAs under one roof - no more trying to remember several different company names, addresses and phone numbers. Just remember a directed-trustee or custodian will not provide you with any tax or investment advice or strategies. You can still work with your local broker, investment advisor or other financial professional to form and execute your savings strategy; your chosen investments will just be held at a firm that can handle your alternative investment needs.
What kind of service am I going to get?
Ongoing personal service provided by a custodian is key to keeping and maintaining a long-term relationship, but it is often not a consideration at the outset of decision-making. As time goes on, how you are treated and how you are served will be the basis of how happy you are with the custodian. You should know your "service comfort level" before going shopping. Studies show that most people make their decision to select a custodian based primarily upon technology. But they make their decision to stay with a custodian based primarily upon personal service quality.
What to look for: If personal service is of value to you, find out if you will get a different service representative every time you call, or whether you will always talk with individuals who are familiar with your retirement plan needs.
What are the custodian's capabilities for handling your various needs? It's a given that your needs are numerous and diverse, so you should look for a custodian that offers a variety of products and services. Ensure that you can easily contact someone via the phone and check your ability to access your account 24/7 via the Internet.
What to look for: What types of accounts does the custodian offer? What types of retirement accounts and services are available? What experience does the custodian have in servicing real estate in IRAs? How long has the company been in business? Is the company regulated by the FDIC and State Banking authorities? Is this the custodian's only business - and if not, how does this function fit into its overall business? Is servicing accounts an important part of the custodian's business so that there is a long-term commitment to meeting your needs?
What do I get for the fees?
You want results and high-touch service for your fees, but don't want to be overcharged. Make sure that you get an itemized fee schedule to keep track of the costs. Investigate to see if they have different fee options - one size does not fit all. Part of your administrative fee should include a consolidated quarterly statement to provide you all account transactions and on line access to statements and account information.
What to look for: Does the custodian support their fees with detailed and comprehensive reporting that is needed with real estate in IRA transactions? Does the custodian make it easy for you to do business with them?
These are just a few of the many questions you may have as you begin the process of looking for a directed-trustee or custodian that can support and service self-directed IRAs to invest in real estate.
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