Address IRA Self-direction Fears with Knowledge of the Rules
By Jennifer D. Meacham
RISMEDIA, August 2008-For five years Xena Olsen ran Long Real Estate Co., a commercial agency based in Scottsdale, Ariz. She held her real estate license, became a Realtor, received a certification from a self-directed IRA custodial firm, and made a name for her team as consultant to individuals hunting commercial real estate for their self-directed Individual Retirement Arrangements.
“I loved self-directed IRAs and real estate,” Olsen says. “My background was in biochemistry-I wanted to be a doctor. At least with self-directed IRAs, it’s complicated and has lots of intricacies. Your options are almost limitless.”
But she came out disillusioned. “I started realizing that there are a lot of people in the industry that don’t do the right thing behind the scene; people are bending the rules,” Olsen says.
Indeed, curbing the abuses with the loosely-regulated participant-directed IRA industry is the goal of the two-decade-old Retirement Industry Trust Association, based in Florida. “We’re dealing with issues of increased regulations, and encouraging self-regulation,” says Paul Maxwell, a member of the association. He’s also COO of Trust Administration Services, the division of First Regional Bank that administers participant-directed IRAs. I spoke with Maxwell to address Olsen’s concerns.
Valuing IRA-held real estate-Whether real estate or a promissory note or a business entity, an IRA’s assets must be valued annually. Some consultants have said the valuation requires a full-blown real estate appraisal on IRA-held property every year. Not so, says Maxwell. “We’ve adopted a methodology of using comps in the area, and that strategy has worked out just fine.”
Checkbook control- Section 406 of ERISA and Publication 590 of the Internal Revenue Code prohibits fiduciaries, which include self-directed IRA accountholders, from dealing with the assets of the plan in their own interest or for their own account. Yet the advent of checkbook control on IRA accounts has made it easy for some write checks for personal expenses. Hence, self-directed IRA custodial firms are tightening their checkbook-control policies.
“There are a lot of limited partnerships that use checkbook control, so we discontinued accepting those about a year and a half ago, just because of the potential for abuses,” Maxwell says. “The safeguard others have put in is that they will not give checkbook control to the participant … Even though the client pulls the trigger, the custodian has to write the check-so if there’s something amiss the custodian can stop it.”
Administrators vs. custodians-“Administrators of self-directed IRAs are those that set up the documents, make reports to clients and give annual evaluations-those things that are administrative in nature,” Maxwell explains. “Then you have custodians. Those are typically a financial institution-a bank, a trust company-that acts as a depository for the money, provides FDIC insurance on the deposit, and sponsors the documents. There is a lot of confusion between the two.”
At Trust Administration Services, “we’re both an administrator and a custodian,” Maxwell says. “Yet there are others that are administrators that work with a custodial bank to keep the assets and provide the insurance.”
Legitimate custodians will be listed in the National Information Center database, a list of financial institutions collected by the Federal Reserve Board. The firm should have a letter from the Internal Revenue Service/Department of Treasury saying that the firm meets the IRS qualifications for serving in an IRA trustee or custodian capacity.
With those clarifications under her belt, Olsen can breathe a sigh of relief. “The rules are rules,” she says. “If you want to be in this business, you just have to follow the rules and be 100 percent above board.”
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