For many people, retirement investing is not about selecting a portfolio or trying to get the best investment. It’s about reducing something that cuts into your returns: fees. Large fees have undone a lot of great investment decisions in the past—even if someone selects a well-performing asset, that asset can be cut down by the amount of fees that eat into its returns. That’s why people considering Self-Directed IRAs are so rightly concerned about how they will interact with fees. After all, a Self-Directed IRA investor will be working with a Self-Directed IRA custodian, which means that fees are involved. But just how many fees, and what can investors expect? We have put together a brief primer for anyone who might be unfamiliar with how fees work when using an account custodian.
Are Fees Flat or Dynamic?
One of the most important things for people to understand is that in many cases, a Self-Directed IRA administration firm can increase your fees as the size of your account increases. You might call this a “sliding scale” of fees.
How does it work? It depends on the administration firm in question, but many of them might charge you one of two ways:
- More payment for the amount of assets you own.
- More payment for the value of the assets in your portfolio.
Sound like a good idea? The problem is that as your account grows, the fees grow with it, which means that you have less flexibility to make a decent return for yourself.
American IRA, on the other hand, charges a flat fee for the account that you use. This means that your account can grow in either asset prices or number of assets, and your fees become correspondingly small compared to the overall value of the portfolio. This helps you mitigate the damage of fees within the portfolio—and as you go on, the account becomes proportionally low-fee at new levels.
Why Do Self-Directed IRA Custodians Charge Fees?
Because Self-Directed IRA custodians do perform work on behalf of the IRA. Because you are using a Self-Directed IRA to manage some retirement assets, the simple fact is that you will need to work through an intermediary in some cases. This means having someone on your side who can handle paperwork and other administrative duties. It also means having someone who can help you with keeping all of your accounts up to date. That’s worth something.
When you use a Self-Directed IRA, you can invest in all sorts of assets that do not otherwise have “management” fees in terms of investments. For example, many investments such as mutual funds may have aggressive fees, as they charge for the service of running the mutual fund. However, owning a piece of raw land within a Self-Directed IRA doesn’t incur these fees because, well, there’s no mutual fund to manage.
How Do You Learn More About Self-Directed IRA Administrative Fees?
The first thing you should do is look at the website of a Self-Directed IRA administrative firm that you are considering. Do they make their fee structure obvious? Does it make sense? If not, you should ask why they are not using it as a major selling point. If they had a favorable fee structure that investors would love to use, then maybe they would make that prominent at their site.