What Investors Need to Ask Their Self-Directed IRA Provider

Making the decision to self-direct your own retirement account is simple. Selecting the right self-directed IRA provider is fairly straightforward — at least on the surface. But not every self-directed IRA provider or administrator is right for every self-directed investor.

With that in mind, there are a few questions you should ask before making them YOUR self-directed IRA provider.

“What assets would you permit me to hold in my account?”

You need to know going into this interview process that self-directed IRAs are technically identical to more conventional IRAs because the IRS does not distinguish between self-directed IRAs, which can hold almost any type of asset, and traditional IRAs, which can only hold certain assets determined by the IRA custodian or administrator. In the law that created the IRA, 26 U.S. Code 408, terms like “self-directed,” “traditional,” and “conventional” may not be found at all. These terms have emerged to enable self-directed investors to distinguish between different types of IRA custodians.

“Do you work with investors investing in [insert your preferred asset]?”

A self-directed IRA allows you to invest your retirement savings in almost anything, including:

  •     Real estate
  •     Cryptocurrency
  •     Precious metals (with some exceptions)
  •     Intellectual property
  •     Hedge funds
  •     Private equity
  •     Tax liens
  •     Livestock
  •     Heavy machinery
  •     Private mortgages
  •     Private loans

The list is almost never-ending. It will probably not surprise you to learn that most IRA custodians do not specialize in every single type of alternative asset that self-directed investors have ever invested in. As you can imagine, a custodian who is very good at facilitating real estate transactions within your account will not necessarily be familiar with cryptocurrency investments or how to purchase a herd of dairy cattle.

Talk to your potential IRA custodian about how they have handled other self-directed investors with your preferred investment strategies to get a feel for their experience and help determine if they are a good fit for you.

“Can I self-direct my Roth IRA with you?”

This is a “gotcha” question. All types of individual retirement accounts, from Roth IRAs to SEP IRAs to traditional IRAs, can be self-directed. However, a custodian who does not know this or does not permit you to self-direct any type of IRA you own is probably not a particularly good fit for you.

“Have you ever done a deal with one of your account holders?”

If the answer to this question is “Yes,” then you will probably want to steer clear of this IRA custodian. An IRA custodian is a disqualified person according to the IRS, which means that they cannot work with your self-directed IRA to do a deal because that could bring benefit to a disqualified person. The IRS classifies IRA custodians as IRA fiduciaries because they have “discretionary authority” and “discretionary responsibility in administering the IRA.”

There are some IRA custodians out there who actually brag about doing deals with their clients and even bill this as one of the advantages of working with them. While you should consult with a financial advisor and a tax attorney specializing in self-directed IRA law in order to get the final word on this topic, it is generally ill-advised to work with a custodian who does not appear to realize the full definition of “disqualified party.”