Self-directed IRAs are much more powerful than traditional retirement accounts. They allow the account holder to invest in the full range of investments permitted by the IRS (which include real estate, private companies, private debt, and even precious metals), rather than being limited to the standard range of “stocks, bonds and mutual funds” that would be permitted by a traditional custodian.
As you might expect, this additional opportunity and flexibility sometimes comes at a price. Think about two different types of investments you might hold outside of a retirement account; shares of stock in a publically traded company, and a piece of rental real estate. The only costs you’re likely to face with owning the shares of stock are the commissions when you buy and sell shares. Simply holding the stock won’t likely incur any expenses or fees, except perhaps for taxes on dividends you receive, and an account maintenance fee that you may already be subject to.
But holding a piece of real estate for investment purposes is a much different scenario. The property itself is likely to need physical maintenance and upkeep, and there are certain to be expenses connected with finding tenants. And you’ll face a property tax bill every year, even if you aren’t bringing in any rental income.
It’s the same case with different types of investments that you hold within a self-directed IRA. Here are a few important concepts to consider to minimize the investment expenses within your self-directed IRA.
Understand Your Costs Before Investing. You’ll do a much better job of minimizing your investing expenses if you have a better understanding of what they’re likely to be before you invest. If you’re considering a particular type of investment within your self-directed IRA, and you’ve previously made similar investments in non-retirement accounts, then use that experience to estimate what your expenses might be, and to help you identify ways to reduce them.
Shop Around. Even if you’ve determined that you want to make a specific type of investment (let’s say real estate), it can pay to shop around for another specific asset in the same class that might carry lower expenses. For example, rather than purchasing a single-family home that comes with sizable repair costs, you might instead look to buy a property with a similar investment profile but that’s likely to require fewer repairs.
Use a Professional. Believe it or not, managing certain types of investments within your self-directed IRA yourself might be more expensive than hiring someone to do it for you. This is especially the case where you’re unfamiliar with the particular type of investment. When you’re considering bringing in outside help, remember to take into account the fact that you cannot compensate yourself for any time you spend managing investments within your self-directed IRA, whereas you can use funds from within your account to pay for professional management services.
Finally, don’t get so focused on reducing expenses that you fail to consider promising investment opportunities. Ultimately you want to maximize the total return in your portfolio, so if you have to spend a little more in order to make a lot more, that should be a trade-off you’re willing to make.