Regular Retirement Accounts vs Self Directed Retirement Accounts

[S T]

I have a question from posters and their wisdom and experience

Self Directed IRA accounts versus Traditional IRA accounts - this would include Traditional IRA, SEP IRA, or Roth IRA

We are not talking about a large contribution year to year minimum of the $5,000 or current on Roth IRA, and SEP IRA contribution can be may $ 2,000 one year and nothing in the next year.

Any viewpoints

Thanks

Sandy

[John of PA]

Could you define what you mean by self directed, holding assets such as real estate, or just picking your own stocks and mutual funds?

[S T]

In this particular situation, clients issue was a "self directed IRA" both SEP and ROTH and investing in Natl Notes (clients choice) - which now is an issue - Rate of return was great over the last few years - but now in receivorship. Could have also been in real estate - this happened to be in real estate notes. The investment was available through the the Administrator and of the self directed account and what the client directed. Fees from the Adminstrator have also been outrageous!

Clients are looking even after losing most of ther $$ as a Self Directed Retirement (close to $ 100K) (* somewhat like the Maddoff scheme) to continue along that line. (my personal opinion)

Just looking for some basic feedback on pros and cons of "Self Directed" versus traditional accounts at a Brokerage House, say Edward Jones, LPL, Morgan Stanley, etc. - maybe less rate of return, but not such high risk.

Only seeking viewpoints and or experience as I believe we have all encountered losses on different Investment accounts and retirement accounts dealing with our clients.

I am not a licensed securities broker, not giving recomendations, only looking to the information through posts and links from searches. The clients will ultimately have to make those decisons.

Just wondered about pros/cons.

Thanks,

Sandy

[Nashville]

Self-Directed Defined

"SelfDirected" is not a term espoused by the IRS in their code or regs.

The first time I heard "self-directed" with respect to retirement plans was some 20 years ago. The custodians were trumpeting the concept of "self-directed" to appeal to the investor and make him think he was really in control of the instrument. The REAL impact was for the custodian to bail out of as much responsibility as they possibly could.

In terms of what is REALLY self-directed, it can be truthfully said that the investor does get to pick and choose where to invest the money, but he is almost always given a list of things supported (and sometimes underwritten) by the custodian. If a given security does not fit the fee structure or business model of the custodian, they will not offer it (and are under no obligation to do so).

The investor does not get to "self-direct" the terms of the plan, as the various plans are written by the financial institutions and are modeled after plans approved by the IRS. The custodians provide consultants to the contributors, but do not take responsibility for things like excess contributions, year assigned, bad advice, minimum required distributions, etc. And they for shore do not take responsibility for bad investments chosen by the participants, and I agree with them that they should not.

[ATSMAN]

Be careful of self directed IRAs. I had one client who was told by his account manager to deduct the K1 losses on his Sch E? The investments are inside a tax qualified account and his rep insisted that I was wrong.

[Roberts]

A brokerage account IRA IS generally a self directed IRA. It just means you get to choose how it is invested.

There is nothing wrong with a self directed IRA. Just as there is nothing inherently wrong with a trust account, a joint account, ROTH IRA or a Traditional IRA. It depends upon the individual's needs.

[Burke]

Roberts is correct. I have a client who has a self-directed IRA as well as other investments. He is with E-Trade, Ameritrade and Scottrade, (one of them is his IRA, I forget which) and he "self-directs" it by being the one who makes the trades, decides what and when to buy-sell, etc. He has done all right, and that is what he wants. To manage his own money. He reviews his account and is tuned to the stock market nearly every day. He has never put anything in a mutual fund, only individual stocks, bonds and maybe an option here and there. The fees are minimal, and he likes it. It is not for everyone.

[S T]

Thanks all for the comments and insight, I probably did not phrase my op in the best manner for maybe an answer , but you all assisted. These clients are driving me crazy! - So they can now do more research on their own for the small amount that we are discussing in their accounts.

Sandy

[Roland Slugg]

In a sense all IRAs are "self-directed." The question, really, is how many choices the owner has? If he places his IRA with a bank, his choices will usually be that bank's products ... usually just CDs with terms ranging from 1 to 5 years. If he places the IRA with a mutual fund family, such as Vanguard, he will have far more choices ... pretty much any of the Vanguard mutual funds. If he places the funds with a brokerage firm, such as Merrill Lynch, he will be able to invest those funds in almost any stocks, bonds or mutual funds he wishes.

There are also a few independent IRA trustees, or at least there used to be ... not sure if they still exist ... that allow the IRA owner to "direct" them to invest in real estate or just about anything else that's not prohibited by the IRS restrictions. Few people would want or need to have this degree of freedom and choice, but for some it may suit them.

The term "self-directed" does not extend to an IRA owner acting as his own trustee. An IRA must have an independent bank or other corporate trustee. See Code §408(a)(2).

[Burke]

In a sense all IRAs are "self-directed." The question, really, is how many choices the owner has? If he places his IRA with a bank, his choices will usually be that bank's products ... usually just CDs with terms ranging from 1 to 5 years. If he places the IRA with a mutual fund family, such as Vanguard, he will have far more choices ... pretty much any of the Vanguard mutual funds. If he places the funds with a brokerage firm, such as Merrill Lynch, he will be able to invest those funds in almost any stocks, bonds or mutual funds he wishes.

I have many clients who turn over their funds, taxable and IRA accounts, to financial planners. The FP's do the trading, buying & selling, (or their computer modules do) and then they get fees based on the account balance every quarter. If the FP's are doing the trading, buying and selling within mutual fund families, then the IRA owner is getting whacked twice. These would be the types of accounts I would not classify as self-directed.