Do Self-Directed IRAs Need a Custodian?
If you plan to purchase non-traditional assets using a self-directed IRA, make sure your custodian is aware of and understands all rules associated with investing in such unique investments (for instance not transacting deals with disqualified persons). It is also essential that they clearly explain their fee structure.
Most standard IRA providers do not permit investing in tangible alternative assets like real estate or precious metals.
If you want to invest in nontraditional assets outside of stocks and bonds, such as cryptocurrencies or real estate, finding an appropriate custodian is key to doing so. But keep in mind that they won’t conduct due diligence for you; each proposed investment needs to be researched independently by yourself before consulting an adviser (if available).
Alternative investments can be difficult to value. Where possible, verify all information provided in your self-directed IRA account statements regarding prices and asset values.
For added control over your retirement funds, an LLC checking account could provide greater freedom. With such an SDIRA option, you create an independent LLC for your IRA funds and act as its manager – giving you direct control of how they’re spent while sidestepping custodial fees altogether. However, setting this account up may take more time than desired – most household-name brokerage firms do not recommend these accounts due to setup requirements being extensive.
When selecting a self-directed custodian, it’s essential that you consider their fees for managing your account. Many charge either a flat or asset valuation-based fee structure; additionally, be on the lookout for transaction and maintenance fees as additional options.
A good custodian will offer an IRS-approved list of nonbank custodians that you can use to verify their legitimacy and select one which supports all the alternative asset classes you wish to invest in.
Self-directed IRAs provide investors with an avenue to purchase real estate, precious metals and other commodities, private placement securities, promissory notes and tax lien certificates as alternative assets. Many of these investments may be difficult or even illiquid to value and should always consult an independent third-party professional for valuation services. It’s also essential that you strictly abide by IRA and retirement account rules or you could face severe IRS penalties; seek guidance from an experienced tax advisor for best compliance practices.
If you hold a self-directed IRA (SDIRA), filing your own tax returns is mandatory – both for the SDIRA itself and any related investments.
The IRS stipulates that all IRAs, including self-directed IRAs, abide by a set of regulations regarding prohibited transactions such as comingling personal and business funds. If an investment purchased with your IRA violates these guidelines, taxes and additional penalties will be assessed on it.
Before investing, it is imperative to conduct your due diligence. Locate and assess custodians offering asset classes you are interested in as well as fees, integrity and customer support before selecting one to custodize. In addition, research any alternative investments, like real estate purchases. Also remember to verify the fair market value (FMV) annually through an appraiser or third-party providers and present an independent FMV valuation on any proposed purchases each year, says Merryman.
Custodians for self-directed IRAs must verify investment information in the account and file reports with the IRS, but must not offer advice or approve or evaluate an IRA owner’s investment decisions, according to Mr. Learmont. Ultimately, it is up to IRA owners themselves to seek guidance from financial, legal or investment advisors, according to him.
Because alternative investments can be illiquid and difficult to value, IRA owners must conduct extensive due diligence on those investments – this means avoiding newcomers that don’t yet have track records, promising unreasonable high returns, or lacking third-party oversight.
“IRA owners must also understand the tax ramifications associated with less common investments like private LLCs or real estate,” according to Insogna. For instance, rental property owned by an IRA could trigger both income and capital gains taxes; furthermore, custodians of IRA assets must ensure they don’t use them for personal gain or violate IRS code.