How much do you trust the people handling your self-directed retirement plan?
Usually, self-directed investing is mostly up to the individual, but in the end the team behind the account can make all the difference. What happens when your provider doesn’t do what they’re supposed to or doesn't provide the tools you need?
Unfortunately, there are some less scrupulous IRA custodians and providers out there, and the results are not always so nice. If your custodian isn’t holding up their half of the bargain by providing the knowledge and service you need, it can be pretty scary, especially when you realize just how expensive these kinds of mistakes can be.
Here are a few “Horror Stories” we’ve heard through the years, so you know just what to avoid:
1. The Case of the Delinquent Solo 401(k) Plan
THE SITUATION:
Failed to file a Form 5500-EZ
WHAT WENT WRONG:
During an IRS audit of James's business finances, the Solo 401(k) plan was also scrutinized. It was discovered that James' plan was out of compliance because he had not filed the 5500-EZ for the past couple of years. His plan was out of compliance and was heavily fined.
HOW THIS COULD HAVE BEEN AVOIDED:
Solo 401(k) plan owners need to understand their responsibilities for maintaining a Solo 401(k) plan. For any year in which plan assets exceed $250,000 per plan, you must file a 5500-EZ by July 31st after your plan's year end. Not doing so can put you at odds with the IRS, incurring a penalty of $25 per day, up to a maximum of $15,000. The Department of Labor (DOL) penalty for late filing can go up to $2,529 per day with no maximum.
With IRAR’s record-keeping platform, you will receive timely updates about tax filing deadlines and even access calculators to streamline your processes without any hassle.
2. The Case of the Forgotten Deed of Trust
THE SITUATION:
Deed of Trust Not Re-registered
WHAT WENT WRONG:
A client had moved his self-directed retirement account several times while searching for the right custodian. When he attempted to open an account at IRAR, we noticed that an asset (Deed of Trust) was under the name of a different company, not the one he was transferring from. The client clarified that he had initially opened an account at XYZ Institution and subsequently moved to the transferring company. The account owner was unaware of his responsibility to re-register the Deed of Trust when switching IRA custodians.
HOW THIS COULD HAVE BEEN AVOIDED:
Clients must re-register their real estate assets with the county when transferring to a new custodian. All documents, receipts, and letters need to be saved personally and given to the custodian where your assets are held to avoid issues like these and for safekeeping.
3. The Case of the Appearing Asset
THE SITUATION:
Careless Quality Control
WHAT WENT WRONG:
A client was transferring their account and noticed an unfamiliar asset on the account statement from their previous custodian. There was an asset in the account that wasn’t theirs! It ended up belonging to another investor… and no one had noticed.
This begs a lot of questions: Why wasn’t this detected? How long had this asset been in the account? What process allowed this to happen? Doesn’t anyone miss this asset?
Not only is this an oversight issue, but it was also an expensive mistake for the client. Their previous custodian charged per-value (based on the overall IRA value), so they’d been overpaying for their IRA for a long time.
HOW THIS COULD HAVE BEEN AVOIDED:
Truly, this is on the custodian. It shouldn’t have happened, or at the very least should have been discovered before the asset left the provider. But, to prevent errors like this from happening to your self-directed IRA, you should regularly monitor account statements and if anything seems amiss— ask! Especially if the error is fee-related, you want to make sure your funds stay working for you, not your custodian.
4. The Case of the Custodian Solicitation
THE SITUATION:
Violating IRS Regulations
WHAT WENT WRONG:
While talking to a client that was transferring their account to IRAR, we learned they purchased their current investment property through their previous IRA custodian. The client was called directly by the custodian and offered the opportunity to invest in a turnkey rental property through a partner program.
This is specifically forbidden by the IRS*. A passive self-directed IRA custodian or administrator must be at arm’s length from any transaction, and must not provide any guidance or let alone offer an investment.
HOW THIS COULD HAVE BEEN AVOIDED:
Your custodian should be aware of IRS rules for passive self-directed IRA custodians and administrators, and ought to know better. But, in case they don’t— now you do. In fact, it’s good to be wary of any investment provider or facilitator that offers you “all-in-one” packages that are “guaranteed” to make money, especially if they're making this offer out of the blue.
If it sounds too good to be true, it probably is. To prevent this situation (or others like it), familiarize yourself with self-directed IRA rules and regulations, especially around prohibited transactions, to stay on the right side of the law.
5. The Case of the Mysterious Investment
THE SITUATION:
Ineffective Identity Protections
WHAT WENT WRONG:
While finalizing details for an incoming transfer, we asked the client about a promissory note on their previous custodian’s account statement. The client said this wasn’t their investment. They had no idea they’d invested in a promissory note, though they did know the listed borrowers. It looked like fraud.
The potential for fraud is real for any investor, but it is your custodian’s job to ensure identity verification is done properly and thoroughly. Having a policy in place and making sure it is followed to the letter is not only incredibly important to prevent the worst-case scenario, it’s the law.
HOW THIS COULD HAVE BEEN AVOIDED:
If your custodian has lax security protections, there’s only so much you can do, but there are ways to keep yourself safe from potential fraud. Keep all important documents secure. Choose strong passwords that you change regularly, and generally make smart decisions with your financial information. But all of that only does so much if the fraud is committed by someone you know well. Make sure you read any documents you sign, keep an eye on your account statement, and call right away if you see anything that seems out of the ordinary. It’s better to be safe than sorry.
Conclusion
With a self-directed investment, your custodian is the last stop before the buck stops— so their standards need to be high, and you need to know you can trust them to do their job right. There are a lot of things to consider, from transaction costs and annual fees, to service times and allowable investments. You have a lot to think about.
But be sure to consider this essential element: Is your self-directed provider trustworthy? Are they knowledgeable and diligent? Do they know the IRS regulations, and do they process transactions accurately and efficiently? Are they a custodian or an administrator? Do they provide the tools you need to accurately record keep? You need to be totally confident that your custodian is going to fulfill their half of the bargain, every single time, because even a minor mix-up can severely impact your retirement account.
Do you have any questions about IRA custodians, or self-directed retirement plans in general? Our team would love to give you a hand. Schedule a free strategy consult with one of our experienced team members. We’d be happy to help. Happy Halloween!
*“Generally, a prohibited transaction in an IRA is any improper use of an IRA account or annuity by the IRA owner, his or her beneficiary or any disqualified person. Disqualified persons include the IRA owner’s fiduciary and members of his or her family...” (see https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions for more information).
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