Invest. Here. Now.

Self-Directed IRAs

07 Jan 2013 4:54 PM | Scott Reed

Many of us have individual retirement accounts (IRAs) which we use to invest retirement savings in mutual funds, stocks and bonds with tax-deferred or tax free investment income. If you’re like me, you probably think that’s all you can do with an IRA. However, we learned at the Co-op Power summit in July, 2012, that we have many other options for investing our IRA funds, including lending retirement savings to local businesses like Northeast Biodiesel, Energia or Co-op Power or to local community finance institutions like Common Capital, Cooperative Fund of New England or Equity Trust Fund. We learned that certain IRA custodians allow investments to be directed by us rather than a mutual fund manager.

How Does It Work?
After the summit I did some research and found a couple of self-directed IRA custodians on the web. Two examples are the Entrust Group and PENSCO. These companies offer seminars, webinars and online tutorials in managing a self-directed IRA, though they emphasize investments in real estate and precious metals more than business loans or stock purchases (private placements).

The simplest mechanism for investing in a local business is a “promissory note” which spells out the details of the loan your IRA makes to the business. In most cases, the loan will not be secured by any of the business’ assets and it will likely be subordinate to loans the business may have taken out from banks, so this is a very risky form of investment. You need to be diligent in vetting the business before entering into such an arrangement.

Once you open a self-directed IRA and move some of your retirement funds into it, you instruct the custodian to pay out funds for whatever purposes you wish (as long as you are not an immediate beneficiary of the loan or investment). The custodian will supply you with forms to direct the payment (and indemnify themselves in case the investment fails). If you are making a loan I strongly recommend getting a lawyer to draft the promissory note or review the note provided by the borrower. The holder of the note will be the custodian of your IRA, not you, personally.

Fees
The critical differentiators for IRA custodians are support services and fees. PENSCO’s fees are charged quarterly and appear to be higher than the Entrust Group’s fees.

Here are the Entrust Group fees (charged annually):
Annual Fee
Option 1: Based on Number of Assets: $295 per Asset
$295 per asset and/or liability, per year, paid at the time of acquisition. Please note that debt financing on an asset is charged as an additional asset. For example, 1 investment is $295 per year, 6 investments are $1,770 per year.

Option 2: Based on Total Account/Asset Value (Min. $195, Max. $1,995)
If the account value is between Multiply value by
$1 and $24,999 0.0095 (minimum fee $195)
$25,000 and $49,999 0.0070
$50,000 and $149,999 0.0065
$150,000 and $299,999 0.0060
$300,000 and up $1,995
For example, if the account value is $20,000, the annual administration fee would be $195. If account value is $55,000, the annual record keeping fee would be $444.99.

Administrative, Transaction and Termination Fees
There are also nominal administrative, transaction and termination fees.

In Entrust Group’s option 1, we’d pay $295 per year for each asset we invest in, so that would only work for very valuable assets ($295 is 3% of a $10,000 investment but .3% of a $100,000 investment).

Their option 2 is more reasonable for small investors like me. Under option 2, we’d pay about 1% a year for all the assets in our account together as long as we they are valued $20,500 or more and the fee goes down as our account value increases. For comparison, Vanguard mutual funds, which are considered to have some of the lowest fees, charge an average of .2% per year.

Equity Trust Company

I also have been looking at Equity Trust Company which is a more barebones operation with somewhat lower fees. They charge a one-time $50 set up fee and their annual fees are:

$0-14,999 $190.00
$15,000-24,999 $260.00
$25,000-49,999 $300.00
$50,000-99,999 $360.00
$100,000-199,999 $440.00
$200,000-299,999 $600.00
$300,000-399,999 $640.00
$400,000-499,999 $920.00
$500,000-599,999 $1,500.00
$600,000-699,999 $1,600.00
$700,000-799,999 $1,700.00
$800,000-899,999 $1,750.00
$900,000-999,999 $1,800.00
$1,000,000-OVER Negotiable

This is about 1/3 the rate that Entrust Group charges. They explain their fees here: http://www.trustetc.com/company/fees.html#fee and their “special fees” like termination fees are listed here: http://www.trustetc.com/company/special-fees.html. Equity Trust Company has a slide show that explains how you invest the money in your fund which I found very helpful.

[Note: Do not confuse Equity Trust Group with Equity Trust Incorporated, the non-profit in Turners Falls (of which I am a board member) that preserves farmland affordability and operates a loan fund (and local investment opportunity) to support that work.]

Update (11/19/2014): Since I wrote this, the folks at Stakeholders Capital told me about IRA Services Trust which has a flat rate fee schedule and appears to be more affordable, especially for lower wealth investors.

Comments

  • 09 Aug 2013 7:30 AM | James MacAllister
    The potential impact of artists to a local economy. A report on NPR's Morning Edition Friday Aug 9, 2013. The same economy has been studied in Franklin County by Leo Hwang-Carlos, a dean at Greenfield Community College and Abby Templar, a grad student at UMass. We might invite them to do a presentation for Valley Investors.

    Here is a snippet from the web: "How do you fix a neighborhood? What do you do about crime and drugs and the once-lovely old houses that are falling down? The answer in Paducah, Ky., was to turn it into a special place for artists to live, work and sell.

    Paducah, already home to the National Quilt Museum, is far west on the edge of Kentucky, on the Ohio River. Lowertown, so-named for being downriver from downtown Paducah, was once quite elegant — 25 square blocks. But in time it became a difficult place to admire.

    Bill and Patience Renzulli came to Paducah from Maryland for the first time in 2001 after seeing an ad in an art magazine for the neighborhood's Artist Relocation Program. At first glance, Bill says the scene of the neighborhood was awful.

    "But I don't know... I felt something," he says. "There was a spark and I thought that something good could happen."

    On their visit, The Renzullis were dismayed by condemned buildings, grand Victorian homes chopped up into apartments, drug use, crack sales and prostitution. But in 2000, the city decided this would become the Lowertown Arts District. The message: "We'll sell you an empty lot for a dollar. If there's a house worth fixing — try that — same price." The Paducah Bank agreed to help.

    "Within a year there were about eight people that signed up and the next year it was 16 and it just, it grew geometrically," Bill Renzulli says. "It was unbelievable."

    Bill Renzulli, once a doctor, is now a printmaker, with a studio and gallery in back of his house. When Paducah started this movement the town was aggressive. Extra policing. Houses demolished. Foreclosures almost immediate. Vacancies became opportunities, and so the new people came.

    The idea for the Arts District was simple: You can live here, you can work here and you can sell your art here.

    Link to audio and article <http://www.npr.org/2013/08/09/210130790/in-paducah-artists-create-something-from-nothing>;
    Link  •  Reply
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