How Due Diligence Works in a Self-Directed IRA

A self-directed IRA allows investors to pick investments based on the owners’ experience and expertise. Choosing your assets gives you the freedom to grow and build your retirement in ways most investors never imagine. But with this freedom comes some added responsibility. Specifically, it would be best if you vetted your investments. That’s not something Accuplan or any other self-directed IRA provider does for you. You’ll need to do it yourself. So, here’s how.

Investors need to perform their own due diligence into a number of issues regarding a custodian, including: 

  • The custodian’s experience in the self-directed IRA space,
  • Their experience with the specific types of alternative investments you are looking to invest in via your IRA account. For example, if you are looking to invest in real estate or private equity does the custodian have expertise in the custody of these types of assets?
  • Does the custodian understand the unique rules surrounding the alternative investments you might be considering for your self-directed account?
  • Does the custodian have up-to-date technology and is their cyber security sufficient to ensure that your account is secure?
  • What are their fees for opening and maintaining your account? 

Investigate Tangible Assets

Are you buying a bundle of raw land in an area prime for development? Or, is it a track of land unsuited for homes, a marshland, or right next door to a power plant? Is the house in an up-and-coming neighborhood that draws reliable renters? Or in an area with a ton of empty houses and low rents? Is the business doing well, making profits, and looking to expand? Or are they in dire financial straits and barely holding on? Don’t just trust the seller. Verify for yourself.

Vet All Involved

Beyond just the investment itself, are the people involved trustworthy? You need to thoroughly vet the other people involved in the transaction beyond just the asset itself. They should all be vetted from the bank to the real estate agent to the title company and any other person or entity involved. Does the lawyer have a good reputation? Is the broker registered? Does the representative seem knowledgeable? You can google this too. You can also check out the disciplinary history of brokers and advisers on FINRA.

Anyone can fabricate information— so make sure you’re getting your information from a legitimate and trustworthy source.

Why is it Important?

When it comes to investing with your self-directed IRA, do your homework on the investment products. The custodian is not vetting the Sponsor’s track record, risk profile, hypothetical anticipated returns, and how this investment maps to your overall investment strategy. The SDIRA custodian is merely asserting the investment is legal based on the paperwork you have provided.

Communication and back-office customer support are paramount to ensure no unexpected tax events. At times, investing in a real estate syndication may only allow a small window of time to fund the investment before closing occurs or investment is no longer available. Additionally, SDIRA custodians must provide fair market value (FMV) to the government of all retirement accounts annually. In most cases, this will be provided by the issuer Sponsor for your annual tax filings, however, investors must maintain visibility of this process.

Self-directed IRA fees typically fall into two categories: asset-based or a flat fee. An asset-based fee is a percentage of the total assets under the management of an investor’s portfolio. Many firms offer a tiered structure, where the fee percentage compresses as your portfolio AUM increases. These fees are generally paid once a year. With a flat fee, the custodian typically charges a fee each year or quarter based on the number of investments you have in your account. There is usually a set-up fee to start an SDIRA account in both cases, which varies with each custodian.