I get asked all the time about using Self Directed IRAs for investing in private companies or investing in real estate. Usually the story is that someone has worked for a few companies in their career and has accumulated a fairly significant sum of money into an IRA that is sitting around earning minimal returns. Sometimes the story includes a savvy investor instead of minimal returns and the savvy investor is looking for diversification in risky or low risk investments. Rarely does the story every include Financial Planners from any of the main brokerage houses like Morgan Stanley , UBS, etc. I think that has more to do with them wanting their clients money in the firm than it does the validity of investing IRA funds in non-publicly traded assets such as private companies, precious metals, real estate, etc.
The answer I usually give is based on my experiences setting up my own Self Directed IRA (or SDIRA). I looked at a number of SDIRA options out there including Guidant Financial, Equity Trust, Entrust, Provident, & Pensco. All were good options and had a lot of information about IRAs, the tax laws around SDIRAs, and of course details about their programs. The big thing that jumped out at me was the limits and restrictions on the SDIRA were far more expansive than I thought they would have been. I mean seriously, there are a lot of restrictions on things like:
- Life Insurance Contracts
- S Corporations
There is also a long list of prohibited transactions, including any direct or indirect
- sale or exchange, or leasing, of any property between a plan and a disqualified person;
- lending of money or other extension of credit between a plan and a disqualified person;
- furnishing of goods, services, or facilities between a plan and a disqualified person;
- transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
- act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or
- receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.
Not exactly a short list. There are more details on all of these, but you get the sense here. I have a bunch of notes on these with more detail. Let me know if you want a copy (email/comment = notes) – happy to share.
Back to my quest – once I got comfortable with the rules and regulations around SDIRAs, I dug into the details of the transfer and which firm to go with. My investments would be in any and all possible asset types and so far I have used the SDIRA in real estate and angel investing. My requirements were that the overall cost (which I was able to pay mostly out of my pocket vs. out of the IRA) had to be low, the amount of effort required to put together an SDIRA had to be low, and I had to have 100% control of the investments. What I found was that there were a lot of different ways firms would charge and depending on your goals one could cost a lot more than another. Some had astronomical fees so I got rid of those right away. Others had fees at least in range of each other and that is where I started.
The lowest cost overall was Entrust – they had a simple process to setup – yet had fees for every check written/received. They also had additional fees for metals trusts. Equity Trust was not that far behind – yet didn’t have any check written/received fees. Their heavy cost was in the $440 annual fee. Guidant was third and instead of having a bunch of fees, their fees were high up front while they setup a LLC for you and super low annual fees. Pensco was fourth when I first started looking and would be the lowest now – yet they still have all sorts of per-asset fees.
Here is a little table (again… email/comment = spreadsheet)
|One Time Startup Cost||$ 3,000.00||$ 50.00||$ –||50|
|Trust Cost||$ –|
|Annual Fees||$ 105.00||$ 440.00||$ 375.00||$ 250.00|
|Annual sub-total||$ 5,250.00||$ 22,000.00||$ 18,850.00||$ 12,500.00|
|Present Value of Annual Fees||$1,041.06||$4,362.52||$3,718.06||$2,478.70|
|Current Total||$ 4,041.06||$ 4,412.52||$ 3,718.06||$2,528.70|
At the end of the day, I went with Guidant Financial. I really liked the concept of having an LLC that I could control and manage like my other businesses. I have a checkbook that I can write checks to people from and can receive payments back and put them in my bank account without worrying about going to a separate firm… I just go to my bank like I do with all my other transactions. I also liked that the cost of setting up was not the most expensive considering my perceived value. I figure if it takes $1-2k to pay someone else to setup an LLC for me, having Guidant Financial do it as a part of setting up my SDIRA is going to be a much better deal.
With my new setup I have written a few checks directly from my IRA and received a few checks as part of the returns those investments have received. I simply take photos of the checks and put them into my account for safe keeping just like I would anything else.
I’ll put up another post soon about how the account is setup and what was good and bad about using Guidant Financial.