As indicated yesterday, I’ll be talking about what’s known as the Self Directed IRA/401(k) — Qualified Plans. Let’s first define what that basic phrase, ‘Self Directed, actually means. Before that though, besides the vastly increased freedom to use your own judgment, the list of what you can actually invest in is expanded big time — including, of course, real estate. 
Self directed simply means exactly what it implies. It requires the owner of the Plan to make the decisions and subsequent investments on behalf of the of the plan itself.
What’s a Custodian?
Again, exactly what it implies. The custodian’s job is to ensure the plan’s owner is staying within the rules and regulations set forth by the IRS. They’re also responsible for maintaining records of all transactions, filing IRS reports, and generally being a traffic cop, keeping the owner within the boundaries established by IRS. They’re a kinda super administrator if you will.
Note: Rules for a self directed 401(k) don’t require a custodian. Don’t ask me why, cuz nobody seems to have a concrete answer. It’s just the way it is.
Now, some folks opt for what’s known as the LLC strategy, to avoid the bother of a custodian looking in on their every move. An LLC is created, and managed by the IRA owner. He then directs his IRA to ‘invest’ in the LLC. At that point, many believe the same tax benefits/rules apply. In fact they actually have what they think is a favorable court ruling to back that claim.
Look, why mess with something as ambiguous as one court ruling? Just see how far you can stay away from the cliff’s edge, and stay within the rules as codified. A self directed IRA using a custodian is under your control. That’s the main factor. You WANT the custodian there to keep you from accidently violating some obscure administrative rule. I strongly recommend against using the LLC strategy.
More next week. Meanwhile, call me and we’ll talk about it. 619 889-7100. Have a good one.
Related posts:
- More Definitions For Real Estate Investors Tax Deferred Exchanges
- Some Definitions For Beginning Real Estate Investors
- Some Definitions For Beginning (or not) Real Estate Investors
- Always Wonder What Certain Terms Mean? Real Estate Definitions
- Facts About Buying Real Estate Through IRA’s and 401(k) Qualified Plans
About BawldGuy
You lost me. Are you saying that the owner of the 401k/IRA should be their own custodian as well? Or are you speaking of assigning some sort of lawyer or CPA type deal as such?
Hey Josh — Absolutely not. I consider having a custodian a huge necessity. Look at them as a sorta ‘right hand man’ to you, the Chairman of the Board. They have your back re: all the details/regs etc.
All I was noting was that self directed 401′s don’t require a custodian.