Fees That Come with Having a SDIRA

This may or may not come as a shock, but all retirement custodians have fees. They don’t just set up the IRAs and allow you to invest freely without dipping their hands into your pockets for their cut. So, we’ve dedicated this section to taking a look at the various fees that you can expect a retirement custodian to charge.

Example 1: Public Custodian

Let’s start off with the Public Company’s/Big Brand name and their fees. All of their fees are well hidden, and if you conduct your own research you’ll find that it’s tough to get a straight answer. We picked apart a mutual fund from a well-known custodian that sets up self-directed IRAs for things such as stocks and mutual funds.

The fees for stocks were easy to calculate at $9.50 for every trade. These are separate charges for the buy and sell side. Therefore it is safe to assume that you would be charged $19.00 for every fully completed trade. This is a factor that you must consider for calculating profit and losses when trading on these platforms. But what about the Mutual Fund?

We chose a mutual fund was a little more aggressive, paying a fluctuating interest of 4%-6% on an annual basis with the ability to cash in within a one-week time frame (potential penalties from the custodian may apply). At first, there did not seem to be any fees associated with owning this asset when buying and potentially selling it, assuming you held it for at least a year. So where did the fees come into play?

They came in the form of earnings. It took a lot of digging, but we found out that the mutual fund was actually earning around 10% on average. That means that the custodian was keeping 5% of our earnings on average. To put that in perspective, if you invested $100K your fees would come out to $5,000 on an annual basis. Some people are outraged when they hear that, but I always remind them that no work was involved on the investor’s part. The investments were selected for you, you performed zero due diligence, and ultimately just parked your money. This means that your custodian took care of all of that, and the fee they charged for their time & knowledge was $5,000.

Example 2: Private Custodian

Let’s switch gears to looking at investing in a self-directed IRA with a private custodian. You will quickly notice that their fees are listed and they are much more forthright about what they charge and why. I am going to use the company Quest Trust’s fee schedule as an example, but each custodian will be slightly different with slight variations in the fees being charged. I will also add that this breakdown is in no way sponsored or affiliated with Quest Trust company or any other custodian. This is not a recommendation, but simply a means of providing an example.

The first fee is a $100 application fee to create the self-directed IRA. This means that before you have even contributed funds or made a single investment you are out a hundred bucks. The next fee appears after you make your very first investment. Regardless of the amount you are investing, this fee is $125. When the custodian sends money to fully purchase an asset with your IRA, there is a banking fee. The amount fluctuates depending on whether a check, wire, or ACH is used. For this example, we will assume a wire transfer was used (a wire transfer is the most expensive method at $30.00). Lastly, every custodian will have an annual maintenance fee for either the account or for each investment you hold. We are once again going to assume the most expensive option is being used, a flat fee of $350.00 a year for each investment you hold. So, altogether the fees come out to:

  • Application fee: $100.00
  • Buying an investment: $125.00
  • Banking fee: $30.00
  • Annual Fee: $350.00

Altogether, these fees are a combined total of $605.00 annually, including the one-time application fee. This means that future annual totals will be $505.00 on the high end. Some custodians may charge a smaller application fee and a larger annual fee, or some other variation, but despite what private custodian you choose this is pretty much the norm.

When comparing the two custodians, the first one yields a high-end 6% return on your money, but involves paying $5,000 annually (assuming a $100K investment) in fees. However, by opting to manage the custodian’s responsibilities yourself, conducting your own due diligence, and taking control of your funds, you could potentially earn a full 10% return or even more. With this approach, on the same $100K investment, you could generate $10,000 per year while only incurring approximately $500 in expenses, thus saving thousands of dollars in fees annually.

Unfortunately, because private companies are transparent about their fees, many people mistakenly perceive them as expensive. In reality, they may have never closely scrutinized the true costs imposed by their current institution, as these costs are often hidden. Overall, if you’re willing to put in the effort, utilizing a self-directed IRA through private companies for tangible assets is the preferred route.

The next question that invariably arises is who bears the fees: the retirement account or the individual? The answer to this is unique, and when people ask the most suitable response is often, “it depends.” When considering fee payment, you should consider a couple of factors: the account and the investment.

Type of account: When assessing retirement account types, they can be categorized into two: pre-taxed and post-taxed. Pre-taxed accounts encompass contributions that allow for a tax deduction at the time of contribution (typically). These accounts also mandate Required Minimum Distributions (RMDs), requiring you to withdraw funds at a certain point. If fees are paid from a pre-taxed account, it might be perceived as cheaper than paying them personally. For instance, if you withdraw $500 from the IRA to cover a fee, that $500 is added to your Modified Adjusted Gross Income (MAGI), and you’ll owe taxes on those funds. Conversely, if the IRA pays the fees directly, you don’t owe taxes on that $500, thereby easing the burden on the IRA holder.

The aforementioned scenario strictly applies to a pre-taxed IRA. However, if you’re utilizing a post-taxed IRA, such as a Roth, the argument could be reversed. Remember, if you withdraw funds from a Roth IRA for a qualified reason, it could be tax-free. Therefore, it’s preferable to retain as much money within the Roth IRA to cover fees, enabling the funds to grow more easily and accrue more tax-free wealth in the future. Before determining who should pay the fees to an IRA custodian, evaluate whether you or the IRA should bear the burden.

Your Investment: Often, when individuals utilize a true self-directed IRA to acquire an asset, they have precisely the amount required for the transaction. For instance, if I have exactly $50,000 in a traditional IRA, and the investment I’m considering is also $50,000, it would be advantageous for me to cover the fees personally rather than burdening the IRA. This scenario is quite common because individuals may overlook custodian fees when transferring funds or making contributions to an IRA for an investment.

Before establishing a self-directed IRA, always consider the fees, and remember that a custodian being significantly cheaper than another doesn’t necessarily imply superior service or guidance. A helpful adage to bear in mind is: if you pay Wal-Mart prices, you receive Wal-Mart customer service and guidance.

Recap

  • Beware of hidden fees associated with public, big-name custodians.
  • In most cases, public companies will be more expensive but require less due diligence on the account holder’s end.
  • You can pay custodian fees directly or through your retirement account.
  • Don’t be scared of the fees, just be aware of them when making considerations.
DISCLAIMER: The content of this website and any associated content is for informational purposes only, is not intended to and does not constitute an offer to sell or the solicitation of an offer to purchase to any person in any jurisdiction, and is not and shall not be construed as investment, legal, business, or tax advice.