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Save Your Assets by Picking the Right IRA Custodian

Diversify Retirement Properly Or Else

Real estate investing with self-directed IRAs is a strategic way to diversify your retirement portfolio and grow your IRA account. However, while every IRA is self-directed, not every custodian is willing to invest in every allowable asset, such as real estate. Many of the bigger brokerage houses, like Charles Schwab, do not allow alternative investments in an IRA, and they prefer to stick with more traditional investment options, such as stocks, mutual funds and bonds. It is at the discretion of the custodian to allow or disallow the types of investments you can make.

This Week’s Video Highlight Reel

[0:12] Terry shares an important topic based on an interesting article from, titled, “Court Nixes Real Estate Move in Schwab IRA.”
[0:34] Although every IRA is self directed, the IRS allows custodians to choose what type of investments they offer.
[1:06] What happened to a Charles Schwab. Their customer who didn’t realize he couldn’t invest his IRA in real estate?
[1:37] Find out how a huge mix-up occurred between the account holder, Charles Schwab and the title company.
[2:07] The customer missed an important clue that something was amiss because he didn’t review or see the tax document in the mail from Schwab.
[2:50] When the investor finally realized their mistake years later, no taxes had been paid on the property, landing the Schwab IRA owner in hot water with the IRS.
[3:05] The Schwab account holder finally got the situation fixed through lots of paperwork and numerous phone calls, but that was not end of his troubles.
[3:30] Pertinent advice from a custodian. Any time you plan on investing in a different asset class with your IRA, be sure to contact the custodian to make sure it’s allowed. Otherwise, this could be extremely costly.
[4:03] How could the investor have avoided his IRA pitfall?
[4:25] Communicate with your custodian, to be certain that they will allow you to make the investment you intend to make.
[5:04] Terry shares a practical example about investing in real estate at Sunwest Trust.
[5:29] Protect your self directed IRA – “Make sure that when you think you have an investment in your IRA that you actually do.”

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A Poor Decision Made with a Charles Schwab IRA

Guy Dabney’s story is the perfect example of what can go wrong if you pick the wrong custodian for your preferred investments. Dabney’s IRA account was with Charles Schwab, and despite the customer service rep at the Charles Schwab support line assuring him that he could not invest in real estate if his account was with them, he overrode that information and went ahead with the purchase of a piece of land. Ultimately, his self-directed online research on IRAs caused him to believe that his purchase would be valid … even if Schwab did not allow it.

The second mistake Dabney made was to instruct Schwab to wire money to the title company closing the transaction on the land he was buying, neglecting to ensure that Schwab would become the custodian of the property. He told the title company to put the title in the name of his IRA, which is correct, but the title company made a mistake and instead titled the property in Dabney’s name. Schwab, meanwhile, treated the wire as an early distribution rather than an asset purchase, and later that year sent him a 1099 so that he would pay the higher, early distribution taxes on it (which he claimed to have not seen). Dabney did not pay them, but when he went to sell the land two years later, it caught up with him and he had to pay the 10 percent early distribution penalty. Not only that, but he narrowly avoided paying the 20 percent accuracy-related penalty for substantial underpayment of income taxes.

What about more exotic investment options, such as real estate, precious metals

or hedge funds? Well, unfortunately, none of the major online brokers are going

to offer good access to these kinds of alternatives.

– Charles Sizemore, chief investment officer of Sizemore Capital Management

Know Your IRA Custodian and Pick One That Allows Real Estate

If you’re excited about the possibilities of investing in alternative assets with your IRA, know that your custodian will handle the transaction and oversee the administration of your real estate asset if it allows real estate transactions. Make sure your custodian will allow you to invest in the asset you have an interest in. Contact your custodian to talk about it, and do your due diligence (talk with a realtor who specializes in investment properties, an attorney to look over your purchase and sale agreements, and a CPA and/or financial advisor about any unforeseen tax issues).

In Dabney’s case, he should not have assumed that his online research trumped the information that the Schwab help line gave him. Instead, he should have automatically transferred his account to a custodian that worked with nontraditional IRA assets.

Prohibited Transactions No Custodian Will Allow

Even if you find a custodian that focuses entirely on the less traditional types of investments, there are certain investments it simply won’t touch. You cannot sell your own property to your IRA. You cannot invest in a property purchased by a disqualified person. Disqualified persons include members of your family, such as your spouse, ancestor, lineal descendant and any spouse of a lineal descendant, any party that has any say in managing your IRA or its assets, and any entity in which you own at least a 50 percent share. For example, you cannot sell property that either you or a disqualified person owns to your plan, or buy property for personal use – e.g. to vacation in; neither can you use a property you bought with your IRA as collateral against a loan.

Many, if not most, custodians disallow [real estate] (as Schwab does). There are numerous administrative and legal issues involved that dissuade most custodians from offering it. – Ed Slott, CPA

Limitations and Real Estate IRA Pitfalls

So again, do your due diligence when you’re making investments, but also do your due diligence to ensure that the custodian you’re going to do business with will allow you to make that investment in the first place, or you will face expensive consequences. Dabney not only made a poor decision in buying the real estate through his IRA with Schwab; he also did not seek the advice of a CPA who was well-versed in IRA real estate transactions.

If you need to find knowledgeable and experienced tax, investment and legal professionals, ask your custodian for recommendations, or start with local organizations – your state’s realtor board, bar association or CPA society. An excellent resource for checking a professional’s history is the Better Business Bureau.

Talk to your custodian, and look at its website in detail. Sunwest Trust allows nontraditional investments, but if, for example, you want to invest in land in Costa Rica, make sure the custodian you are with will allow investments in foreign real estate. Also, for those of you who currently think you have an investment in your IRA, make sure you actually do and that the investment is still growing and the tax is deferred. A little research on the front end will save you a lot of heartache on the back end.


  • Make sure your IRA custodian permits the investments you are interested in.
  • Avoid having your IRA investments treated as early distributions.
  • Most big brokers will not offer access to alternative IRA investments.

Summary of Recommended Resources:

Full Video Transcript:

Hi, I’m Terry White, CEO of Sunwest Trust, and this is Tuesday at 2. Thank you for taking your time to come watch this video. There are a couple of things I wanted to talk about. I have a thing on my computer called Google alerts where it alerts me about different things and I found a couple of interesting articles I want to talk about this Tuesday at 2, and I want to talk about the next one, but this is from financial The title of the article is Court Nixes Real Estate Move in Schwab IRA. Basically, what happened is an individual had an IRA at Charles Schwab and it really doesn’t matter where it is at, but they had an IRA at the brokerage house. What a lot of people don’t understand is every IRA is self-directed, but the IRS allows custodians to decide what kind of investments they want to allow their customers to invest in.

Obviously, your brokerage houses like you to invest in stocks, bonds, and mutual funds those kinds of things. So the investor, the account holder of the IRA at Charles Schwab, did not realize that he couldn’t invest that IRA into a piece of real estate. As we all know, in previous videos we’ve done all over the Internet you know that you can invest your IRA money in real estate, but you have to know if the custodian will allow you to have that type of investment with the account you have with them.


The interesting thing that happened was the account holder instructed Schwab to wire money to the title company that was closing the transaction the purchase for the land and he also instructed the title company to put that land title to land in the name of his IRA, which is correct. Apparently, the title company made a mistake and titled the property in his own name, which he didn’t find that out for a couple of years, but what also happen was Schwab thought they were distributing money to this account holder as opposed to making an investment for his IRA. Schwab sent him a 1099, which he claimed he didn’t remember seeing, which is not surprising, as we’ve seen stuff all the time and people don’t necessarily see it or you don’t necessarily look at the things you get from Sunwest Trust or from whoever your custodian is, as you think it is something you already know about, but you got the 1099 saying that – hey we gave you this much money and you need to include this we didn’t say that, but what you have to do with the information on the 1099 is include that in your tax return for the taxable year and then pay taxes on it. Well he obviously didn’t do that.

It ended up catching up with him. He realized a couple of years later that this property was not titled in his case, Charles Schwab custodian, for my self-directed IRA it’s just titled in my name directly he was able to get that fixed cost he got an affidavit from the title company saying, “Oh, we messed up. We didn’t put it in the right name,” but the IRS thing was still a problem because Charles Schwab had treated that as a distribution and in fact Charles Schwab does not allow you to invest in real estate in your IRA with them.

The moral of the story is when you’re getting ready to do something different in your IRA. In other words, you have an IRA that handles you have stocks, bonds, and mutual funds in, and you want to invest in, what we term nontraditional assets. Contact the custodian you’re dealing with or contact the custodian picture that you are moving to or look at their website and again like we’ve said about your investments doing your due diligence. Do your due diligence about the custodian that you’re dealing with and make sure that they will allow you to invest in what you’re thinking about investing in.

In the case of this gentleman, he should have contacted Schwab and said “hey can I invest my IRA in real estate,” most likely they would have told him no you cannot, and then he would’ve needed to look for a custodian that would allow that and then transfer the money. So again, as we always say, you know, do your due diligence when you’re making investments but before that do your due diligence to make sure that the custodian you’re going to do business with will allow you to make that investment and you don’t have a misunderstanding where they just think – oh, you are wanting to buy a piece of land you are going pull money out of your IRA to do that and here’s your money and we will send you a 1099 and you’ll be sure and put that on your tax return just like your are supposed to.

Hopefully, this is information that is valuable to you and you’ll understand why you know why different custodians why you have to be sure the custodian that you are using allow you to make the investment that you want to make you might find the custodian like Sunwest Trust, but you want to invest in land in Costa Rica, which is a legitimate investment within your IRA, but for some reason the custodian you are with will not allow investments in foreign real estate. They do that and sometimes those kinds of investments are not economically feasible or administratively feasible for the custodian, so they simply don’t do it.

Talk to your custodian, look at their website, and make sure that they’ll allow you to invest in what you want to invest in to make sure that when you think you have an investment in your IRA you actually do and it’s the money there and the investment that you have is still growing tax-deferred or tax-free.

Thank you for taking the time to watch today’s Tuesday at 2. As always, write your comments as we love to hear from you. If you have questions, put those on there too. We will answer the questions and some of the questions we might use for future videos, so thank you very much. I look forward to seeing you again next week.

Save Your Assets by Picking the Right IRA Custodian was published on:

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.