Self-Directed IRA fees are Comparable to those of the Regular IRA
When I was selecting a self-directed IRA for putting some of my retirement funds into bitcoin and gold, I was looking at various features of the IRA plans. Comparing self-directed IRAs fees was one of the most important and yet difficult exercises.
Initially, I was under impression that the self-directed IRA account is more expensive than the regular IRA because of its smaller scale and uniqueness of underlying investments. After several days of studying the subject I am convinced that the self-directed IRA is actually not that expensive, and in many cases, is cheaper than the regular IRA.
The difference is that with the regular IRA you pay fees from your mutual fund or ETF and don’t see them unless you intentionally looking for them. Because the fees are taken out from the mutual funds directly, all you see is your mutual fund reported investment return NET of the fees. Hence the illusion of low or no cost.
Fees in Regular IRAs
The fees in the regular IRA account are the sum of two components – fees charged by underlying investment manager and fees that IRA provider charges. The timing and drivers of those fees are different, which makes building a total costs picture difficult.
Here are typical fees you will pay if you own mutual funds in your IRA:
- sales loads – a fee paid to selling broker of the fund, not to exceed 8.5% by FINRA regulation
- redemption fees – paid to the fund at the time of shares redemption, not to exceed 2% by SEC regulation
- exchange fees
Annual Fund Operating Expenses:
- Management fees
- Distribution fees (12b-1)
- Total annual fund operating expenses
- Other fees
Here are the fees that IRA provider may charge on the top of mutual fees:
- Account setup
- Maintenance fees, for example, Ameriprise charges $60-75 per year
- Account transfer fees ($30-35 for outgoing transfers)
In many cases, IRA provider may waive on not charge the above-mentioned account setup and maintenance fees. Usually, this is the case when the IRA provider is also a fund manager who offers their investments through the IRA. For example, Charles Schwab.
It all adds up. Important to remember that fund fees are taken directly from your mutual fund. The rate of return that the fund reports is net of those fees.
Self-Directed IRA Fees
In the self-directed IRA you invest in assets that typically are not managed – physical gold, real estate, bitcoin and other currencies and therefore the investor does not incur the investment management fee.
The fees here are charged by IRA provider for accounting, reporting, and custody of the investments. There are potentially more new categories of fees: for example, legal and storage.
- Legal fees might be charged for creation of Limited Liability Company (LLC) for check-book IRAs – Solo401k, for example, will charge you $1,100
- Storage fees will be charged for storage of your precious metals ($8-20 per month range)
Self-directed IRA fees are driven by the IRA provider’s business model. There are typically three major distinct models: administrator/facilitator, custodian, and facilitator (LLC IRA, checkbook IRA). They all have their benefits and disadvantages and target a particular investor. Let’s look at each one of the models separately:
This is the most common model. IRA custodians do have custody your funds, provide record keeping and IRS reporting. Technically, the assets in the IRA don’t belong to you directly. To qualify for tax benefits the assets should belong to the qualified party that is registered with the IRS and permitted to hold pre-tax assets.
Custodian will hold your assets under their name but for the benefit of you. This structure ensures that the funds maintain their tax benefits. This is a very important point with all self-directed IRAs – no matter what kind of investment you hold – real estate or gold it is held under the IRA name, not yours.
Custodians can be regular banks and other types of financial institutions. Non-financial custodians and trustees are called non-bank trustees (NBT) and have to meet certain IRS requirements and be registered with IRS. They are a part of a regulated community, meet various IRS and FINRA requirements, and as a result, permitted to physically hold funds.
Fees are driven by a change in the account. Lower cost initially, then maybe higher if there are many changes in the account – funds move in and out often
- No intermediary between you and the organization that holds your investments
- Sole focus on accurate record-keeping
- Access to funds takes some time because of required paperwork
- Don’t provide investment advice
- If you plan to move money in and out often can be expensive – typically they charge cost per transaction
Examples of Custodians: Preferred Trust Company, Kingdom Trust, Equity Trust (previously Sterling Trust)
With this model, IRA provider does not have custody of your funds and acts as an intermediary between you and your custodian. Some of the custodians don’t market their services and to bring new customers they rely on administrators. Administrators typically are smaller companies and work in specific niches such as precious metals, cryptocurrencies, real estate. Normally they work with one big custodian, such as Kingdom Trust or Equity Trust. Administrators help with the account set up, perform some record keeping, transaction management, etc. Usually, their fees are driven more by the number of distinct assets. Lower costs initially, sometimes waived, higher afterward.
- Better knowledge of particular asset type
- Usually, more responsive customer service
- If funds are pooled – takes more time to withdraw funds
- Administrators aren’t as regulated as custodians – less oversight means greater changes of administrator’s error or misconduct.
- Examples of Administrators and Facilitators: Entrust, Broadfinancial
Examples of fees:
For example, Entrust gives you two options: charges $299 per asset annually, or from $199 to $1,999 if you choose to pay based on account value. All other fees apply account set up, annual fee, transaction fees, account termination fees, etc.
Facilitators do provide advice and consulting service and facilitate transactions. They, as administrators do not have the ability to hold the funds. For this reason, they have to be associated with a custodian who can. Facilitators will help you establish an LLC for opening the checkbook IRA. Usually, it will be a one-time fee for the LLC set up. Custodian fees will still apply.
Example of fees:
LLC establishment – $1,000 to 2,000
With checkbook IRA you have access to funds immediately – you just write the check
Not regulated and is not responsible for prohibited transactions.
Examples of facilitators:
IRA Financial Group, IRA LLC Partner, Nabers Group
To summarize – custodian self-directed IRA fees will apply regardless of the type of IRA.
Depending on your investment style and structure of your investment each type of IRA provider has the fee structure that can work for you. Should you plan to hold multiple asset classes – IRA administrator self-directed IRA fees most likely will be costlier for you. In case you plan to actively move money in and out – custodian fees will be higher.
Finally, if you need a checkbook IRA you need a Facilitator.