Self-Directed IRA - who to trust?

[Katie Accashian]

I am looking to take money from my retirement that I accumulated from my previous employer and move it into a self directed IRA to buy a real estate investment. This seems like a great fit for me other than the fact I cannot find a company that has modestly good reviews. I've looked into 6+ including calling and experiencing the customer service myself and have not found one that seems reliable. Any suggestions?

[Jeff S.]

Many here don’t realize that there are custodians and administrators for IRAs.  By law, all IRA funds must be held by a custodian. Depending upon whether they are a bank or a trust company, custodians are heavily regulated by the IRS, DOL, possibly the FDIC, State Banking Commissioner, and maybe the Comptroller of the Currency. Administrators are not subject to any such scrutiny and are really just middlemen. Be super careful.

An administrator will pass your funds to a custodian in the background, provide statements, and hopefully help you stay within the law when you invest your IRA funds. Custodians do exactly the same thing but with the added regulatory and financial scrutiny noted above. Why would you place your money with an administrator?

It's not always obvious, but you can tell if you are dealing with a custodian rather than an administrator because they will usually have the word "Trust" in their name or they will be a bank or brokerage. Always ask, and don't be swayed by a sales pitch suggesting that the distinction doesn't matter—it absolutely does. If you think this distinction is unimportant, consider what happened to investors who placed their IRA funds with American Pension Services,—an administrator whose founder mishandled their money causing a $22 million loss.

It sounds like you want checkbook control, @Katie Accashian In this case, you need a special-purpose LLC. This means an LLC with an operating agreement specifying the IRS regulations regarding prohibited transactions, disqualified individuals, and others. It will allow you to invest the money on your own but under authority of the custodian. You would typically use a lawyer to set this up for you. Not LegalZoom.

Last, be careful of recommendations. Some here have self-interests. Other recommendations might not suit your situation. For example, fee structures among custodians are all over the map. Some charge based on account value, others per transaction, and some use a combination of both. If, for example, you are lending money, which involves few transactions, then select a custodian that charges by the transaction. If you are flipping houses, which is transaction-intensive, then choose a custodian that charges by the value of your account. What works for some might not be your best choice.

Best of luck to you, Katie.