Anyone who’s looking into investing in a self-directed IRA should familiarize themselves with self-directed IRA fees. Here’s everything an investor should know about the costs associated with having a self-directed IRA.
In this article:
- What Is a Self-Directed IRA?
- What Are Self-Directed IRA Custodians?
- What Are the Fees for a Self-Directed IRA?
- What Is the Best Way to Obtain a Self-Directed IRA Fees Comparison?
- How Can an Investor Lower Self-Directed IRA Custodian Fees?
- Are Self-Directed IRAs a Good Idea?
Self-Directed IRA Fees | Costs Associated with a Self-Directed IRA
What Is a Self-Directed IRA?
Self-Directed IRA vs Conventional IRA
A self-directed individual retirement account (IRA) is different from a conventional IRA because it allows account owners to take control of their investment and have a more active role in making investment decisions. With this type of IRA, the account holder can invest in any asset allowed in a conventional IRA, plus other alternative assets.
Investment Options Available for Self-Directed IRA
The primary difference between these types of accounts is that a Self-Directed IRA allows people several other investment options besides stocks and bonds. Common examples include:
- A membership interest in a limited liability corporation (LLC)
- Mineral rights, including oil and gas
- Precious metals, including gold and silver
- Real estate
- Tax lien certificates
- Underdeveloped land
Setting Up a Self-Directed IRA as Either a Traditional or Roth IRA
A self-directed IRA can be set up as a Traditional or Roth IRA.
- In a Roth IRA, the investment is post-tax, which means investors are taxed when contributing rather than withdrawing.
- In contrast, the gains in a Traditional IRA won’t be taxed until the investor withdraws.
Benefits of Self-Directed IRAs
Some of the benefits of a Self-Directed IRA include:
- It allows people to set aside money for retirement on a pre-tax basis.
- The same contribution guidelines of $6,000 annually for under age 50 and $7,000 annually for over age 50 apply.
- Self-directed IRA contributions lower a person’s tax rate.
Despite the name, people don’t manage self-directed IRAs on their own.
What Are Self-Directed IRA Custodians?
By law, investors can’t hold onto their own IRA funds. They must deposit the money with a company known as a “custodian,” who manages the funds for them.
People considering this option will want to know the amount of their self-directed IRA fees before opening the account.
What Are the Fees for a Self-Directed IRA?
Self-directed IRA custodian fees can vary significantly from one custodian to the next. Custodians may charge several fees associated with managing the account.
The most common ones include:
- Fee to establish or set up an account — One-time payment required when opening the account
- Wire transfer fees to complete a deposit or fund an investment
- Annual fee for general account management services
- Note that different companies have different payment schemes. Some may require an annual payment, while others may have a quarterly mode of payment.
- This fee is often computed based on the total value of the account or the number of assets in it.
- Fees for requested services such as overnight mail, certified mail, or a cashier’s check
- Additional fees that a custodian may request include:
- Fees to pay bills (i.e. sending a check) for real estate assets
- Storage fees if the custodian is holding physical precious metal assets, like gold or silver
- Payment for any additional services, such as research
What Is the Best Way to Obtain a Self-Directed IRA Fees Comparison?
Custodians offering a low-cost self-directed IRA should provide account holders with a fee disclosure statement prior to opening a new account for a customer. It’s essential that customers collect a statement from any company they’re considering using as the custodian for their IRA account so they know exactly what they’re paying for.
Investors who haven’t settled on a custodian yet can also use the fee disclosure statement as a way to compare what each company is charging. Again, it’s important to note that different custodians have different payment schemes, so it’s essential to thoroughly go over everything to compare.
For example, if one company provides a quarterly quote for custodial fees, it should be multiplied by four before comparing with a custodian that has an annual payment scheme.
The self-directed IRA custodian’s fees disclosure statement can usually be found on the company’s website. Customers can also request to have a copy sent to them by mail or email.
How Can an Investor Lower Self-Directed IRA Custodian Fees?
While self-directed IRA custodian fees are inevitable, investors can take several steps to keep them as low as possible. For example, they should request statements from several IRA custodians for comparison purposes. Since knowing what the fee covers is also important, investors should always ask for clarification regarding any fee they don’t understand.
Working with a custodian experienced in the area where the IRA account holder potentially wants to invest is important since working with an expert can save the investor both time and money.
The custodian may even be able to combine some services for greater savings. Understanding the fees associated with certain actions can help people plan and manage their expenses.
Are Self-Directed IRAs a Good Idea?
Self-directed IRAs allow people to pursue their passions.
Someone who has always wanted to make real estate deals or work with alternate currency can do more of what they enjoy by directing their own IRA accounts.
However, it’s important to understand the limits imposed by the Internal Revenue Service (IRS), such as on types of investment and strict criteria for managing the account. Meeting with a financial advisor can help investors consider this and other options before pursuing a specific one.
Before deciding on a self-directed IRA custodian, it’s essential for investors to thoroughly understand the custodian fees that come with that company. In this way, they can minimize the self-directed IRA fees they have to pay, which can also cut into one’s nest egg.