Entrust vs Equity Trust

[John Public]

I'm thinking of moving my IRA to an SDIRA. It seems these company's are the dominant two in the business. Does anyone know what the prose and cons of either of them are? Thanks.

[Jon Holdman]

Let me back up just a little. A self-directed IRA just means you get to choose the investment you want. Even a Fidelity account is, strictly speaking, a self-directed IRA, since you can choose whatever stock or mutual fund you want. But, they won't let you buy a house. That's their choice. Other companies are more flexible and will let you make loans, buy a house or invest in securities that aren't publicly traded. These give you a lot of flexibility in what you buy, but charge higher fees. They also have a fair bit of paperwork to make purchases. Nothing really onerous, but more than just getting online in your Fidelity account and buying a listed stock. It does take some time, though. You won't be able to go to someone's house and write them a check and buy their house. You can do a contract on behalf of your IRA, though, and close the contract pretty quickly.

There are a number of prohibited transactions, such as buying this house from yourself, your parents or you kids. The custodian will check out the transaction and make sure you're not violating any of these.

But, if your goal is to run a business, there are a couple of ways to structure your IRA to provide money for the business. These do get more complex and expensive. I've not done any of these, but have looked at them and spoken with several of these companies about how to set it up. These structures get the money into a company you control. Basically, you create a company, and then get the IRA to invest in the company. You cannot do it as simply as it sounds, because any company you control more than 50% is a disqualified person that your IRA cannot deal with. Look up the Asset Exchange Strategies guys and call them and ask about starting a company using your IRA money. They sent me a paper that discussed the options and the pros and cons. Its marked confidential so I don't want to repeat the details here. Guidant Financial's web site also has a description. One of them, and I don't recall which, quoted $5000 to set up the whole deal, so not something to do lightly. The advantage to this approach is that you now have a business that has cash, and it can do almost anything you want. Flip houses, open a franchise restaurant, whatever. Depending on the structure, though, owning rental properties might not be allowed. That's considered a passive investment, and some of the structures only work for "operating companies."

If the LLC you want to buy into is not controlled more than 50% by you, though, you don't need this flexibility, hassle or expense. Just open an account with one of these guys that lets you buy into private placements, and direct them to buy units in the LLC.

This is a complex area. Don't try to short cut the process. If you do engage in a prohibited transaction, and the IRS finds out, they will invalidate your entire IRA account, not just the prohibited transaction. That will require you to pay taxes and penalties right away on the entire balance. So, if you had one account that had a bunch of stocks as well as a house, and there was a prohibited transaction involving the house, you would owe taxes and penalties on the stocks, too.

I'm not a lawyer or an accountant, so your mileage may vary.