What you need to know if you’re considering a self-directed IRA.
By: James Hitt, Entrust Carolinas
How does a self-directed IRA work?
A self-directed IRA requires the account owner to make investment decisions and investments on behalf of their retirement plan. There is a large array of investment decisions you can make. You can invest in practically anything that you can think of with the exception of wine, rugs, antiques, collectibles, and most types of coins. One thing you will hear me say throughout this article is: “Don’t take their word for it, test it.” So, don’t take my word for it, visit the IRS website yourself at www.irs.gov and look at publication 590 (specifically pages 44-49). It’s all laid out for you.
Now that you know what you can’t invest in, it is time to have fun thinking about what you want to invest in. The key is to select a type of investment that you enjoy and have knowledge about. Remember, you don’t want to invest your life savings in some widget that you know nothing about. Lots of investors select real estate, because they have purchased homes in the past and understand how that market works.
Isn’t it great to know that you have so many more options than stocks and mutual funds? Maybe there is a business venture that you would like to be a part of. Or perhaps you know a full time investor that is willing to pay you a substantial interest rate and collateralize it by a piece of property he owns.
How Do I Get a Self-Directed IRA?
You need to find a reputable self-directed IRA administrator or custodian. It is important that you know what you should expect and what questions to ask so that you are able to make an educated comparison and, ultimately, an informed decision about who that administrator or custodian should be. Here are some things you should consider:
- Are their IRA specialists CISPs?
- How much and what kind of fees do they charge?
- How accessible are they to you?
- Do their business practices meet your needs?
What are CISPs?
If you are wondering what a CISP is, you are not alone. We are self-directed IRA administrator or custodians and you wouldn’t believe how often people ask us what CISP means. CISP stands for “Certified IRA Services Professional,” and the title is issued by the Institute of Certified Banks (ICB), a nonprofit organization sponsored by the American Bankers Association in Washington DC.
To earn their CISP designation an individual must demonstrate excellence in the field of IRA services. This means these individuals must have at least two years of experience with IRAs, an education about IRAs, pass an exam, and agree to abide by a code of ethics. The CISP exam is a detailed and difficult exam that covers IRA documentation requirements, employer plans, the rules of IRA eligibility and contribution requirements, the specifics of IRA distribution requirements, and many more IRA related issues.
The CISP certification is designed to give formal recognition to those who meet specified standards as well as continuing professional education and development requirements. You can now see how important it is to find a self-directed IRA administrator or custodian that has CISPs available to work with you. Let’s face it; you wouldn’t go to an accountant for help if they didn’t have their accounting degree and the experience to do things correctly. No more should you put your IRA funds in the hands of someone who is inexperienced.
How much? And what kind of fees do they charge?
This is a very important area for you to pay attention to. You want to pick a administrator or custodian that is fair and up front about the fees they charge. Every self-directed IRA administrator or custodian will have what they call a Fee Schedule. You should ask for a copy of their Fee Schedule and do line-by-line comparisons before you decide who to do business with. When doing the line-by-line comparisons, be sure to pay attention to whether their fee schedule has options built in.
For example, we offer an option that allows clients to decide whether they would like their annual fee to be charged based on the number of assets in their account or the value of their account, and we allow them to elect to change that option as they need to. This option allows someone who has lots of small assets but a small account value to minimize their fees. It also allows someone with a large value in their account but a small number of assets to minimize their fees. It’s beneficial to IRA holders to find an IRA administrator or custodian that is more interested in seeing their clients’ accounts grow than they are in increasing their own wealth. One word of caution, though: Make sure you see the schedule for yourself, don’t just take their word for it.
Self-directed IRA administrator or custodians have the option of waiving certain fees that may be listed on their fee schedule. If a self-directed IRA administrator or custodian tells you that they do not charge a fee that is listed on the fee schedule, make sure you have them mark it on the fee schedule, sign it, and date it. This will protect you down the road from them claiming that they forgot or never made that exception for you.
How accessible are they to you?
Think about it, you just found the perfect investment opportunity. In fact, you can’t believe they are selling it at that price. You call your self-directed IRA administrator or custodian and you get, “Please press 1 if you speak English, please press 2 if you are calling about your billing information, please press 7 if you would like to speak to an IRA specialist.” You press 7 and you hear, “We’re sorry, all specialists are busy right now. Please try back later.” You finally get in touch with your IRA specialist a few days later, but the deal you had your eye on has been snatched away by another investor.
Accessibility is important! Don’t just take the administrator or custodians word for it, though. While you are making a decision about which self-directed IRA administrator or custodian you want to use, call them to see how long it takes to get a real person on the phone. Ask them some questions about investments that you may be interested in. Their CISP should be able to talk to you in an educated, patient manner explaining whether or not the transaction you are thinking about is prohibited or not.
Do their business practices meet your needs?
This is an individualized issue. Your self-directed IRA administrator or custodian and you need to fit together like the pieces of a puzzle. If you are a busy professional who prefers to communicate by e-mail, make sure they accept and respond well to this type of communication. If you’re someone who would rather pick up the phone or stop by in person to see your self-directed IRA administrator or custodian, do your homework and make sure they are accessible to your satisfaction that way. Perhaps you work all day during business hours and need a administrator or custodian you can reach on the weekend via cell phone. Don’t be afraid to ask and test their business practices. If they say they are reachable by cell phone, ask for their cell phone number and call them. If they say you can stop in any time, stop in. If they say you can e-mail them anytime, e-mail them and see how long it takes to get a response.