There is often a lot of confusion and misinformation circulating around that muddles the perception of self-directed IRA (SDIRA) custodians and accounts. Unfortunately, this perception can steer investors away from what could be a beneficial wealth-building tool to bolster their retirement strategy. Preferred Trust Company is here to debunk a few of those common misconceptions.
IRA Custodians are all the same – Fake!
This is far from the truth. There are two types of IRA custodians. The first is “traditional” IRA custodians (i.e. Vanguard, Charles Schwab, TD Ameritrade) only manage and invest retirement funds into publicly traded investments like stocks, bonds, and mutual funds. You are not able to use these “traditional” IRA accounts to invest in alternative assets. The second is self-directed IRA custodians, like Preferred Trust Company, that administer and custody alternative investments, such as real estate, precious metals, and cryptocurrency.
There are also differences between self-directed IRA custodians, varying with the types of investments they are willing to custody to their fee schedules. For example, Preferred Trust Company allows cryptocurrency investments, whereas a majority of the SDIRA custodians out there do not. It is the discretion of the custodian as to which types of assets they are willing to custody. Some custodians charge a higher annual administration fee and do not charge for transactions, while others will charge a lower annual fee but will charge for each transaction. You should also consider whether the company is actually a licensed custodian, like Preferred Trust Company, or if they are an administrator. Administrators are not subject to the same regulatory oversight as custodians. For more information on the difference between custodians and administrators go to our blog at http://bit.ly/PTC_IRABlog.
The differences highlighted above illustrate why it is important that you perform your diligence to ensure that the company is the right fit for your retirement strategy.
SDIRA Custodians’ nickel and dime you with fees – Fake!
If you are familiar with the fee schedules of “traditional” IRA custodians, you will notice that SDIRA custodian fees tend to be higher because administering alternative assets often requires more maintenance than your typical conventional investment. For example, when you invest in a stock the process is automated, you enter an amount, click a button, and watch your shares ride the stock market roller coaster. On the other hand, when you invest in a rental property, the purchasing process is substantial. There may be property improvements and expenses as well as collection of rents which are all transacted through your IRA.
Be sure to review fee schedules thoroughly to avoid any confusion and frustration, and keep in mind that “traditional” custodians make money off the investments, SDIRA custodians do not.
Self-Directed IRAs are a separate type of IRA – Fake!
Even though there is a difference in what you can invest in with a “traditional” IRA and a self-directed IRA, there is not a difference between the types of accounts that they custody. All account types (i.e. traditional, Roth, SEP, SIMPLE, etc.) follow the same IRS guidelines and regulations as far as contributions, distributions, age restrictions, etc.
Note: If you have two IRAs, one with a “traditional” custodian and one with a self-directed IRA custodian, you are still only able to make your annual maximum contribution between the two accounts. In other words, you cannot make a $6,000 contribution into each individual account in the same year. You can contribute separate amounts that when combined equals $6,000 (the annual contribution limit for 2021) or $7,000 (if you are age 50 or older), or you can choose one of your two accounts to make a full contribution for that year.
You cannot contribute to both a 401k and a SIDRA – Fake!
Given that 401k contribution limits tend to be significantly higher than the standard IRA account, it is not surprising that many people may be under the impression that you can only contribute to one or the other, not both. Depending on your situation, contributing to two different accounts could allow you to get the best of both worlds. You get the benefit of employer 401k perks (if there are any) such as matching or employee stock, as well as additional investment options that are available with an IRA, specifically with a self-directed IRA. A SDIRA would allow you to diversify a portion of your retirement funds with alternative assets (i.e. real estate, precious metals, cryptocurrency) against the limited number of conventional investments that are available to you in your 401k (i.e. stocks, bonds, and mutual funds).
SDIRAs are complicated to open – Fake!
Opening a SDIRA is just as easy as opening an account with any other financial institution. Many, like Preferred Trust Company, are able to accept online applications and electronically signed documents. However, it can take some time to transfer funds from another SDIRA custodian or “traditional” custodian. You must remember that these companies are in competition with each other to retain your business and will often drag their feet when you request that they direct your cash into an account that is not their own.
My IRA balance is too low to self-direct – Fake!
You don’t need a million-dollar IRA to start self-directing investments. There are opportunities with lower barriers to entry than your typical rental property or fix and flip, such as trust deeds, precious metals, and cryptocurrency. If you are diligent about keeping your funds always working and you are consistently making your annual contribution, this could help you on your way to growing your account more quickly and being able to make larger investments, if that is your goal.
Have you recently changed jobs? If you haven’t already consolidated your funds into your new employers 401k plan or maybe your new employer doesn’t offer one, you can rollover or transfer the entire 401k account or just a portion to really give your SDIRA account a boost in funds to invest with.
SDIRA custodians help you choose and manage your investments – Fake!
Custodians are not legally allowed to provide clients with any financial advice. It is the role of the custodian to hold your money in a qualified account and administer the transactions at your direction to maintain the status of qualified funds (tax deferred or tax free depending on the type of account). It is up to you to select the investments you are making. It is your responsibility to ensure that you are not engaging any prohibited transactions, to perform due diligence on a company or third party that you are going to invest in or through, and to monitor your investment’s progress and value. If you need assistance in managing your account, you should refer to a financial advisor and/or a tax professional depending on the type of help you need.
Investing in alternative assets is risker than traditional investing – Fake!
Traditional investments may be more familiar to us, but it doesn’t necessarily make them any less risky than investing in alternative assets. It is important to gauge your tolerance for risk before engaging in any type of investment because there is no such thing as a guaranteed investment.
Note: It is important to be careful of not falling prey to fraudulent schemes. You are the one directing your investments, so it is your responsibility to perform proper due diligence before engaging in any investment opportunity.
If you are interested in adding alternative real estate investments like trust deeds to your retirement strategy, Click Here to schedule a no-obligation consultation at your convenience to discuss how it works with a self-directed IRA. Now until December 31st, 2021, Preferred Trust Company will waive the establishment fee and first year administrathttps://info.preferredtrustcompany.com/preferred-trust-company-consultationion fee for all new accounts. Give us a call at 888.990.7982 or visit our website and apply online to take advantage of this offer today!
PREFERRED TRUST COMPANY, LLC (“Preferred Trust”) | 2140 E Pebble Road | Suite 140 | Las Vegas, NV 89123 | 702.990.7892 | www. preferredtrustcompany.com | Financial Institutions Division of Nevada License No. TR1002. Preferred Trust performs duties of a custodian and as such, does not sell investments or provide investment, tax, or legal advice. Preferred Trust is committed to safeguarding all non-public personal information provided to us by our customers. Preferred Trust collects, retains, and uses customer information where we reasonably believe that it will help administer our business or provide services to our customers. We collect and retain customer information only for specific business purposes and upon request will inform customers why we are collecting and retaining the information. We use information to protect and administer records, accounts, and funds; to comply with certain laws and regulations; to help us design or improve our services; and to understand the financial needs of our customers. Preferred Trust is an accredited member of the Better Business Bureau.
Members of the editorial and news staff of the Las Vegas Review-Journal were not involved in the creation of this content.
