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Who Should I Set Up a Self Directed IRA With?

Who to Set Up a Self Directed IRA With

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Video Highlights:

[0:10]  How do you open an IRA account?  There are 5 types of self-directed IRA services.
[0:43]  The first party involved is the investment seller.  Who gets the loan?
[1:22]  The seller needs a TPA or custodian to work with an IRA investment.
[1:59]  The second party is the promoter or broker, who works to raise money for others’ investments.
[2:28]  The broker can use money from non-IRA investors, but they need to go through a custodian when working with a self directed IRA.
[3:01]  The third entity is someone who sets up a self-directed IRA LLC with checkbook control.
[3:28]  The self-directed IRA LLC setup is not the custodian, so make sure to find out who the custodian is.
[3:48]  TPAs, or third party administrators keep the records, but must still be associated with a custodian.
[4:30]  Last and most important is the custodian, such as Sunwest Trust.
[4:57]  What are some questions I should ask when setting up a self-directed IRA?
[5:50]  The custodian has to hold the title to the IRA assets.
[6:27]  Be diligent and understand what you’re getting into before sending your money.

The five parties you’ll come across while setting up a self-directed IRA.

Online advertisements and articles abound with information about setting up and investing with your IRA. While it would make sense to have one main representative to talk to about planning your IRA, there are a number of parties you might work with, and they all focus on different aspects of your IRA. The top types of self-directed IRA services you’ll come across while setting up a self-directed IRA are the:

  • investment seller,
  • promoter or broker,
  • LLC creator,
  • TPA or Third Party Administrator, and
  • IRA custodian.

Investment Seller – The creator of the investment or the person receiving the money that will be used to turn a profit. This person, the investment seller, is gifted at finding good self-directed IRA investment opportunities. For example, perhaps he is great at flipping houses, so you decide to lend him some money to buy, repair, and sell a house.

Investment sellers seek out investors for their money making projects, and both IRA and non-IRA owners are possible investors for their ventures.  You can invest in this person’s opportunity with your IRA if he or she is a non-disqualified party (see past blogs if you are not sure who the qualified parties are).

If you wish to invest with him inside your IRA, then you will need a TPA and a custodian for your IRA account. An investment seller will not be the custodian for your IRA or do the record keeping for your IRA, but he can more than likely refer you to one he is used to working with.

A self-directed IRA involves a custodian holding your money in the account and makes investments in things like real estate, private placements and metals for you based on your directive. —Donna Fuscaldo

Promoter or Broker – A company or individual trying to raise money for particular investments he may not be directly linked to. For instance, the broker could be raising money for an oil and gas company, but would never get out in the field and pump the oil himself.

The broker or promoter specializes in raising funds for the cause, but usually moves on after the funds have been raised. He can use both IRA and non-IRA investors’ money for his venture, assuming it’s a legitimate investment and all the permits have been given.

If the promoter or broker is going to use IRA money for the project he’s recommending, he’ll need to use a TPA or a custodian, because the custodian has to hold title to the assets.

LLC Creators – Companies specializing in creating LLCs (limited liability companies) in order to give you checkbook control of your IRA. They will often help you with the application process and setup of the self-directed IRA’s LLC, and then pass you off onto the custodian attached to your new LLC. They may even do the paperwork to get your account set up with a custodian.

With LLC creators, it’s a good idea to ask deeper questions and find out which custodian they use before entering into any contracts. They might say that you are the checkbook IRA custodian, but while LLCs and checkbook control are great tools, neither the LLC creators nor you can be the custodians. Make sure that the custodian they use is a custodian you want to do business with.

Two initial issues that should be carefully considered by a retirement account owner prior to setting up a self-directed IRA are: (1) “what custodian should I use” – there are actually a lot more of these custodians out there than you might think; and (2) “will the IRA invest directly or through an IRA-owned LLC structure?”  Failure to consider these issues and rashly transferring funds to a particular custodian because “my neighbor uses them” can lead to administrative hassle, unnecessary fees, and other problems. – Warren L. Baker, J.D., LL.M.

TPA or Third Party Administrator – A record keeping company. They keep accurate records for your IRA and can answer any basic IRA questions. TPAs must be associated with a custodian to hold the assets, because they are not banks or entities. The Internal Revenue Code section 408(n) says that you have to be a bank or an entity that is governed by the state banking regulators in order to be a custodian.

IRA Custodian – Holds the titles to the assets held within your IRA and completes IRS reporting. Sunwest Trust is a custodian, and as your custodian can give you all the self-directed IRA set up help you need.

As you’re trying to answer the question “How can I set up a self-directed IRA account?” figure out who you want to set up your IRA account with, find out who the custodian is, and/or find your own. Investment sellers and brokers might connect you to a custodian. LLC creators and TPAs have to use a custodian. All of those people have a role to play, but they all have to have a custodian who holds the titles to the assets.

When you find investment opportunities, consider the following:

  • the party you’re dealing with,
  • the other parties involved,
  • the amount of involvement that each party has and their responsibilities, and
  • your own responsibilities.

All of these companies and individuals play vital roles in your investing successes, but knowing when and how to use them is key. [Mat Sorensen’s The Self Directed IRA Handbook also explains each role in detail. If you’d like a copy, we’d be happy to send you one.] Our fundamental point is this: Don’t waste your time and money by involving unnecessary parties when you don’t need to.

Takeaways

  • Cut the middlemen: IRA custodians are indispensable.
  • Brokers need custodians too.
  • TPAs must be associated with a custodian who holds the assets.

Recommended resources:

Video Transcript:

Hi, my name’s Terry White, CEO of Sunwest Trust. I see a lot of advertisements, and articles, and stuff on the internet regarding various people purporting to be setting up IRAs or wanting to get investments out of IRAs. I thought it might be important to just go through and name the parties that you might run into and also what their roles are. I’ve basically come up with five different parties that you might run into, who you might see advertisements for, who you might be talking to, and I just want to name who those are. There may be others that I haven’t thought of, but these are the ones that I’ve come up with.

The first one is going to be the person that has created the investment or, let’s call them, the seller, the investment seller. If you have someone that you’re going to loan money to, the person you’re lending to would be the person I’m talking about. Or, if you have a friend who flips houses and you’re going to lend them money, or you’re going to buy the house, and they’re going to do the work on it, something like that, that would be the creator of the investment. That person might be looking for people to invest money in what they’re doing, which might be outside of an IRA or it could be inside an IRA. If you’re going to invest with them inside your IRA, then you would need some of these other parties I’m going to talk to, namely, either a TPA or a custodian. Just keep that in mind. The person selling the investment by themselves are not the ones who are going to be the custodian for your IRA or do the record keeping for your IRA. In most cases that I’m aware of, all cases that I’m aware of, they are not going to have a relationship with that person other than some kind of a business. Maybe they refer accounts to them or something like that.

The second entity or person you might run into is what I’ll call a promoter or a broker. That’s someone who’s out there trying to raise money for a particular investment, but it’s not necessarily their investment. It might be someone who maybe I go out and I raise money for oil and gas investments, and I don’t really do the drilling, or I’m not the person that’s doing that, but I’m just out there raising money for them. Again, I might be taking money from non-IRA-type investors, which is fine assuming they have all the right authorizations and they’ve done everything they’re supposed to do to make it a legitimate investment. But, if they want to do that again, if that promoter or that broker is going to use IRA money or is looking for IRA money, then they’ll need to use a TPA or a custodian. Ultimately, you have to use a custodian for all these because the custodian has to hold title to the assets.

The third kind of advertisement I’ve seen is people that are creating LLCs, Limited Liability Companies, in order to give you what they call checkbook control of your IRA. A lot of these LLC companies, you might find them advertised on the internet, and they will create the LLC, and they’ll go ahead and help you set up the account or even do the paperwork to get your account set up with a custodian. But, they are not the custodian. Sometimes, you have to look through what they’re doing to see who the custodian is and is that a custodian that you want to do business with. One way or the other, you need to do that due diligence.

So far, we’ve got the investment creator, we’ve got the promoter or the broker, and we’ve got the person that creates LLCs. Now, the other two people that I’ve come up with are the people that are actually keeping the records for your IRA. That would be a TPA. We call them a TPA, which is a third-party administrator. And what that is is  just a record keeping company, a company that keeps the records for your IRA, but they have to be associated with a custodian, because the Internal Revenue Code Section 408N says that you have to be a bank or an entity that is governed by the state banking regulators in order to be a custodian. Regardless, all of these people that I’ve talked about ultimately have to be dealing with a custodian.

That brings up the last person that you could deal with, which would be the custodian. Sunwest Trust is a custodian. There are several other custodians out there and, then, there are several TPAs out there. I would just encourage you as you’re trying to figure out who you want to set up your IRA account with, are you dealing with a custodian? Are you dealing with a TPA that uses a custodian and who is—find out about the TPA and then find out about the custodian that they use? Are you dealing with someone who just creates LLCs and, then, they’re going to pass that on to either a TPA and then, finally, a custodian or directly to a custodian and avoid the middle person, the TPA, doing the record keeping there? Custodians do record keeping also. Are you dealing with a promoter who is someone just out there trying to raise money for a particular investment? Again, you’ll have to have a custodian, ultimately, for that transaction.

And, then, the very last one is the person that created the investment. If you have an IRA and you’re lending money to people to buy houses or for whatever purpose then, the person you’re lending to is the one I’m talking about. They’re the investment seller.

Again, all of those people have a role to play, and it’s sometimes a very important role, but they all have to have a custodian. Ultimately, the custodian has to hold title to the asset. Be careful when you’re out there. When you see opportunities, investment opportunities, do your due diligence. Make sure you understand what party you’re dealing with and what other parties are going to be involved, and the amount of involvement that each party has and what their responsibilities are, and what your own responsibilities are. We’ve done several videos on doing your own due diligence, so just keep that in mind.

Well, I hope this has been helpful to you, maybe it gives you an idea of questions to ask when you start looking into possible investment opportunities. I would encourage you to be careful, be diligent, look into it before you send money, or make a big investment. Make sure you know and understand what you’re getting into. And I would encourage you do join us again next week for Tuesday at 2:00 and I’ll look forward to seeing you then.


Who Should I Set Up a Self Directed IRA with 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.