As you explore your retirement account options, you will soon discover that all IRAs, whether traditional or nontraditional, must be held and supervised by a custodian. An IRA custodian works as the bank for the retirement account and is highly regulated by the IRS and state and federal banking commissions. Custodians have to meet stringent federal requirements in order to keep their good standing. In most cases, custodians or trustees also serve as the administrator for the account.
There are very few IRA custodians currently working with self-directed IRAs that invest in “nontraditional” areas like real estate. This is partly because many more man-hours are needed to complete a real estate purchase and because the majority of IRA holders concentrate on traditional stock-market purchases. Most custodians just aren’t set up for other kinds of transactions.
Because the IRA custodians who do allow nontraditional asset participation can’t implement as many procedures electronically as they can with traditional IRA structures, the fees they charge for simply holding account assets are costly. Custodial asset-based fees are charged according to the amount of money held in the retirement account. As the value of the account rises, so does the holding fee.
Traditional self-directed IRA custodians will also charge transactional fees every time the account holder makes an investment. This is not unlike fees charged by high-end brokerage houses (commissions for trades).
The relationship between most retirement account custodians and account holders is much like that between a parent and child in that, if you find an investment you want, you have to go back to the custodian for permission to invest your IRA funds in it.
Here is an example of how custodial fees and time with most custodians can add up. The custodian's ability to service requests in a timely manner is crucial to success with a nontraditional IRA account. Assuming you found a house that you viewed as an ideal real estate investment, you would have a realtor write up a purchase and sale agreement for the property. The purchase would need to be written up as being purchased by your retirement account (not by you as an individual). You would then have to download or request a non-publicly traded asset investment authorization form and fill it out. From there you would need to fax the purchase and sale, the authorization form, and all escrow wiring instructions and contact information to your custodian for their review. There may be a fee for this review (varying from a flat rate to upwards of $100 per hour) and there will be a fee for the custodian to wire the earnest money to escrow.
The time in which that money gets to escrow depends on the custodian, how long it takes the custodian to review the purchase, fill out the necessary documents and whether or not you paid an expedite fee. The closing agent (escrow or attorney) will forward the appropriate documents to your custodian to sign and fund the purchase of the home. There is a fee involved for a notary, additional wiring fees, recording fees, safekeeping and more. Once a purchase is recorded and funded, the deed will need to be forwarded to your custodian for safe keeping. Needless to say, over time asset and transactional fees could just about nickel and dime your finances to death!
This is why many investors now are turning to self-directed IRA providers like Guidant who have created structures that help investors avoid these many custodial steps and fees. For example, the checkbook control Guidant’s IRA LLC account provides, combined with Guidant’s preferred custodial relationships, has eliminated all custodial involvement with investment transactions and all transactional and asset-based fees. Self-directed IRA LLC clients, in effect, become their own “bankers” and “brokers.” This kind of personal control – along with savings in time and money – is one of the reasons why the self-directed IRA LLC is enjoying significant growth. And this is why Guidant clients have found the self-directed IRA LLC a tremendous value.
More Information: Self Directed IRA LLC & Small Business Financing
