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Self-directed IRAs allow investors to use their IRA funds for investments such as real estate, private equity or precious metals without incurring extra costs or risks. But self-directed IRAs come with their own risks.
What is a custodian?
Custodians are licensed entities authorized to hold your assets by both state and federal governments. These regulated institutions employ stringent systems, policies, and controls in place to keep your information safe.
Self-directed IRA custodians are financial institutions that specialize in alternative investments like real estate and precious metals. Since these assets can be more difficult to oversee than stocks and bonds, custodians require extra time and energy in order to successfully facilitate manual transactions.
Some self-directed IRA custodians offer account holders “checkbook control.” This feature enables an owner of an IRA to make investments directly by writing checks or wiring funds directly without going through their custodian, providing greater flexibility and control over investments, but can increase risk due to additional paperwork required for each purchase; plus many custodians charge fees for this service that can quickly add up.
How do I find a custodian?
Finding a custodian requires shopping around. Compare fees, levels of service and features until you find one that best meets your needs.
When looking for a self-directed IRA custodian, be sure they specialize in alternative investments. A self-directed IRA differs significantly from the retirement accounts offered by major brokerage firms.
Select a custodian who provides clear disclosure on its fees. They should disclose all expenses up-front, such as administration and transaction charges associated with each purchase.
Additionally, search for a custodian with strong cybersecurity measures. Hacks of personal information have become all too frequent recently; to protect your investment account and to verify pricing accuracy. When investing in real estate or private placements it may also be necessary for the custodian to independently value an asset or property for you.
What are the benefits of using a custodian?
While custodians provide paperwork and administration, they’re not accountable for conducting investigations into the quality or legitimacy of assets held within an IRA account. Because this makes conducting their own due diligence before investing even more important – especially since making an incorrect investment could have serious tax repercussions.
Some custodians charge transaction-based fees instead of asset-based fees, which can quickly add up and drain your retirement savings. Therefore, it is vital that you understand their fee schedule prior to selecting one as your custodian.
Custodians may be slow in processing requests and make buying or selling assets on short notice challenging, which can be especially troublesome when investing in alternative assets like real estate or promissory notes. One solution for overcoming this obstacle is creating a checkbook control account within your SDIRA by setting up a limited liability company funded with money from your SDIRA checking account – creating this limited liability company can allow faster buying/selling decisions!
What are the disadvantages of using a custodian?
Custodian accounts allow for greater investment flexibility than standard IRAs, including real estate, precious metals and other alternative assets. While this flexibility is appealing, there are a few things you should keep in mind before selecting one as your custodian.
Be mindful that a custodian does not assess the quality or legitimacy of an investment or its promoter; that responsibility lies solely with you, along with understanding any tax repercussions pertaining to these less commonly known investments.
Second, custodians tend to charge higher fees than traditional IRAs; it would be wise to inquire into their fee schedule prior to selecting one.
Make sure your custodian has strong security measures in place; hacks are all too common, and you don’t want your retirement account details falling into the wrong hands.
Self-directed IRAs offer great flexibility for investors seeking to diversify their portfolio beyond stocks, bonds, and mutual funds while taking advantage of all the tax advantages of traditional or Roth IRAs. It’s essential that investors work with an reputable custodian who understands all the rules associated with investing alternative assets within an IRA account.