Self Directed IRA

[Effen]

Someone called me today and wanted to set up a self-directed IRA so they could loan a relative money from the IRA. Without getting into that issue, where does a person go to set up a self-directed IRA.

I never heard of a "self-directed IRA" until a few minutes ago. I was told they need an attorney to draft a document. Is that correct?

What makes a self-directed IRA different than a normal IRA? Would any bank be able to offer them, or are they something different?

[QDROphile]

All IRAs are self directed. The question is, what sort of WFS assets the custodian will administer, and at what price? Most IRA providers draw the line at domestic publicly traded securities.

An internet search will turn up some custodians that will administer just about anything. Some specialize in real estate and related paper, but don't limit the scope. In fact, some of them are known for administering bogus arrangements. The custodians have documents all ready for the willing customers, no custom drafting is necessary.

Consultation with a lawyer is a good idea for different reasons, but having your own custom drafted documents can be so elegant.

[GMK]

but having your own custom drafted documents can be so elegant.

Thanks for adding that, Q. I needed a smile on this grey, overcast day.

[Effen]

An internet search will turn up some custodians that will administer just about anything

Any recommendations?

[QDROphile]

I have no working experience with any particular provider. I know some of them because they have been associated with questionable transactions, but that does not mean that they will not serve perfectly well. Google "real estate ira investing" and some names will come up to the top. At least one of those names appeared as a recommendation in a Benefitslink post similar to yours some time ago. No recommendations from me, except get good advice about legality of the investment. The IRA provider might not be the best source of that advice, either directly or indirectly.

[Guest Sieve]

I sent you an off-line PM with a suggestion.

[mbozek]

There are several IRA custodians who will accept non traditional assets such as Entrust or Delaware Charter but the annual fees are steep, e.g., $800+ and the custodians disclaim any responsibility for insuring compliance with the IRC 4975 rules. Google "non traditional IRA custodian or IRA alternative investments" to find the links. Most custodians have an approved IRA document that allows the use of non traditional assets. While an IRA can loan money to an unrelated third party, some family mermbers such as, spouses, parents and children are parties in interest. However, siblings are not parties in interest. Need to check IRC 4975 to find out if loan is a PT. Best thing to do is to put loan in a separate IRA so as not to contaminate other IRA assets.

[John G]

All IRAs are self directed.

Since we have many general pupose readers on this website, let me expand on this comment.

Roths and IRAs are a legal structure that the US government has enabled that offers tax sheltered investing. There is no specific management or supervisory administration that is required. All Roths and IRAs are individual accounts - that's why there is an "I" in IRA. When an individual opens an IRA, they choose a custodian. Some individuals have multiple Roths and IRAs and may have many custodians.

Each custodian is responsible for "holding" the assets and minor government reporting. Each custodian may set rules governing allowed investments, rules that may be more restrictive than what the government mandates.

There are very few government restrictions on how Roth or IRA funds can be invested. The assets can stay as cash, for example.

Individuals have a wide range of choices over who will be making investment decisions. Some folks deligate investment decisions to an advisor. Others elect a "target" type IRA, they may deligate asset allocation decisions to a formula, and within the current year to a fixed list of mutual funds. Alternatively, a taxpayer may elect to make all of the asset allocation decisions and individual investments on their own, which could mean buying/selling bonds, mutual funds, stocks and ETFs.

The TD Waterhouse, Schwabs, Fidelity and Vanguard type custodians tend promote a common denominator type Roth/IRA that meets the needs of most households. For zero or a minimum annual charge, they will let a tax payer "self direct" their account within a range of investments. The list of allowed investments will generally include money market, mutual funds, ETFs, bonds, stocks and perhaps some limited options/commodities such as stock covered calls. These custodians don't want to spend any time on evaluating if an investment is suitable or allowed by IRS rules.

There are both reputable and, well, less reputable custodians that will allow other types of investments: loans, real estate, partnerships, etc. Anyone going this route is well advised to have a knowledgeable accountant and tax lawyer. There are huge issues of self-dealing and prohibited transactions. All of these types of accounts have much higher annual fees. I would argue that for 99.9% of the folks who read this message board that you don't need these types of accounts to reach your long term goals. There are literally thousands of stocks, thousands of mutuals funds, thousands of bonds, and perhaps even a thousand ETFs. Surely there are hundreds of great investments vehicles.

When folks start to look at loans, real estate and other non-traditional IRA investments, my first Q is why? Special "deals" or arrangements are often either illegal or as my daughter my say "shaddy". I would also raise basic questions of risk, liquidity and annual overhead expenses.

[Guest Arlene Futterman]

Someone called me today and wanted to set up a self-directed IRA so they could loan a relative money from the IRA. Without getting into that issue, where does a person go to set up a self-directed IRA.

I never heard of a "self-directed IRA" until a few minutes ago. I was told they need an attorney to draft a document. Is that correct?

What makes a self-directed IRA different than a normal IRA? Would any bank be able to offer them, or are they something different?

Equity Trust sets up self directed IRA's. I actually had one in purchasing RE for investing. You can set one up with or without collateral. They do charge a fee to act as the custodians....

[John G]

Equity Trust and the prior author are somewhat misleading about "self directed". ET is basically a specialty house that is willing to cover some attypical investments like real estate. Virtually all IRA/Roths are by their nature self directing. While you can hire someone to babysit your assets, the major brokerages (Schwab, Fidelity, Ameritrade, TD Waterhouse, Scottrade, etc) and the major mutual fund families allow self directed accounts. Very few custodians however will support real estate and other unussual investments...probably because it is not as profitable as dealing with the 99% of the public that buys funds, stocks and bonds.

Real estate transactions with an IRA and Roth have many potential pitfalls associated with them. If you foul up your account the IRA "nuke" response could be to void the tax exempt status of your account.

I doubt that anyone with less than 1/2 million in IRA/Roth assets should spend even 1 minute thinking about this option.

Equity Trust charges $50 to set up their IRA/Roth and $1,500 PER YEAR if your assets are 1/2 million. Bear in mind that you would be a complete fool not to also spend consulting time from a tax accountant and tax attorney to avoid the potential pitfalls. Also expect a very big commitment of your own time for decisions, monitoring and tracking. In other words, there is a huge overhead associated with investing in offbeat investments.

If you are part of the 99% of the population that has enough trouble pondering your stock/bond/fund investment choices, then don't even think about real estate choices. If you believe that the real estate "grass" on the other side of the fence is greener, then I want to talk to you about buying some prime land in southern Florida.

[QDROphile]

Or you can be part of the population that wants to engage in improper transactions, as the original post suggests.