Trusted Self Directed IRA Providers?

Question

I'm thinking about moving funds from a traditional IRA to a self directed IRA to be used for real estate. It seems to me that the returns in the stock market for the next few years could underperform, as is historically true at the current P/E.

Can anyone recommend a trustworthy SDIRA provider? I think back to the Ponzi Schemes we have seen from 1031 Exchange companies over the years and I just think to myself: man it would be EVEN EASIER to run a Ponzi with a SDIRA company. SDIRA funds are not as ephemeral as a 1031 exchange company which only holds them for a short period.

Which leads me to the question of trust. Who is auditing these SDIRA companies to make sure they aren't dipping into client funds illegally? Which company could be trusted.

Further, with an SDIRA there's significant specialized knowledge necessary to remain on the right side of the tax law: self-dealings, taxes on leveraged investments in SD ROTH, etc. Which providers can act as partners and help clients clear these hurdles.

Lastly, and this should probably be a different post, but anyone doing a 72T on an SDIRA to pull out REI cash flow penalty free before retirement age?

Brian Eastman · Answer

@Ryan B.

There are 3 main types of players in the self-directed IRA industry:

1 - Custodians are regulated financial trust institutions.  They hold IRA accounts and provide recordkeeping services.  They are subject to regular compliance audits at the state and federal level.  The oversight for self-directed IRA custodians is the same as for conventional custodians such as Schwab, Fidelity, Bank of America, etc.  Such institutions are going to be very safe.  Most will have the word trust in their name, like Equity Trust, Kingdom Trust, IRA Services Trust, etc.

2- 3rd Party Administrators are essentially marketing and customer services firms that layer themselves on top of a back-end custodian that actually does the trust/banking work.  To a client/investor, they look kind of the same, but are structurally different.  The administrator is not regulated in the same fashion as a custodian.  Most firms in this space are reputable, but there is greater risk.  APS as mentioned above was a 3rd party administrator.  These firms will not have the word trust in their name, for example CamaPlan, Advanta IRA, New Direction IRA, etc.

With an account with either of the above types of entity, you will have a 3rd party processing layer.  The institution will hold an account for your IRA and process transactions at your direction.  You send them paperwork to execute a transaction and they will follow those orders.  Each interaction with the account requires paperwork, time for processing and per-transaction or per-asset fees.  Custodians are prohibited by rule from providing tax, legal or investment advice.  As such, you will be needing to be very sure of yourself or have a trusted party such as a CPA or tax attorney to guide you in your use of your plan.  A custodian will not necessarily stop a transaction that could result in a rules violation and it is not their responsibility to do so. Of course, most will make a good faith effort to keep you from any gross violations.

3 - Advisors/Facilitators are specialty firms that provide plans that offer checkbook control.  This typically involves an IRA owned LLC or a Solo 401(k) trust. These services will be a blend of legal and consulting work, and in the case of an IRA will involve the use of a registered custodian.  A Solo 401k does not require a custodian and can be fully self-administered by you.  The advisory firm will facilitate the legal and administrative work to setup the plan but will never handle your funds.  They will then (if you work with a quality provider) be available as you utilize the program to provide guidance with respect to compliance.  Some firms have in-house tax/legal counsel and some have contracted outside counsel.  With these types of programs, your funds may need to pass briefly through a custodian-held IRA account, but will ultimately reside in a bank/brokerage account of your choosing, and for which you alone have signing authority.  This type of program is better suited to investments that involve frequent or time-sensitive transactions.  This is also generally the best option if you wish to have access to experienced advice with respect to ongoing compliance.

There are quality providers of all of these services that are active here on BP.  Do some reading and call some providers.  You will pretty quickly be able to tell who knows what they are doing and has your best interests in mind.  Then, perform diligence at the financial layer.

There is way more positive opportunity than systemic risk.  Yes, be cautious, but do not let that hold you back from fully investigating whether you can get better results for your tax-sheltered retirement plan by opting for a configuration that gives you the opportunity to truly diversify.

Dmitriy Fomichenko · Answer

Ryan,

You have a legitimate concern as what you have described had happened in few years ago with APS:

http://www.investmentnews.com/article/20140430/FRE...

But there are ways you can protect yourself from such risk of custodian dipping into your IRA funds. One options is to use what's known as IRA owned LLC (or Checkbook IRA). With this option special purpose, single member LLC is used as an investment vehicle inside of the IRA. Most of the cash with the exception of few hundred dollars transferred from the custodial account into LLC's checking account, that you as the manager have total control. The alternative to that is truly self-directed Solo 401k plan, which does not require a custodian, nor the LLC. The funds are held in the trust which used as a vehicle to hold your 401k plan assets. You as the trustee have total control over your retirement funds and remove the middle man out of the picture. But the 2nd option is not for everyone, it is designed for those who are self-employed or own a small business without full time employees.

Regarding your question about following the rules - regardless which model you chose, you as the account holder are responsible for understanding and following the rules. Custodian might help catch a prohibited transaction but they are not responsible, you are. When you work with a quality provider however, they can help you navigate through all these rules and provide you with the quality education to help you stay out of trouble.

72t rules apply to IRAs in general, self-directed IRA is not excluded so you can certainly use this strategy to access your retirement funds prior to retirement.

George Blower · Answer

@John D.

Send me a message if you would like to discuss further.

John D. · Answer

@George Blower when you mention "very specific rules apply to solo 401k plans and could be challenged by the IRS" can you provide more details because my understanding was that Solo 401K plans are more "forgiving" and any "prohibited" transactions can be rectified with just a penalty v/s having the entire IRA being undone as in the case of a SDIRA

George Blower · Answer

@Ryan B.

IRA Services Trust Company is a good company to use for self-directed IRAs. They have been in business since 1978 and have not had any issues with the government.

The 72t rules work the same regardless of IRA holdings. Obviously the distributions have to flow from the IRA. The following is a good resource for the 72t rules for those readers who are not familiar with this concept.

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments

Lastly, while the solo 401k plan has also been mentioned, keep in-mind that generally (very specific rules apply and could be challenged by the IRS) a solo 401k plan does not allow for 72t distributions.

Trusted Self Directed IRA Providers?

Most Popular Reply