Establishing Your Account

Once you’ve chosen your custodian, your next step is to establish your account.

Account Types

Self-directed custodian offer a number of different types of accounts:

  • IRAs
  • Roth IRAs
  • 401(k) plans for Self-Employed Individuals
  • SEP IRAs
  • SIMPLE IRAs
  • Coverdell Education Savings Accounts

Normally, your choice of account type will depend on the type of retirement account you currently have with your traditional custodian. For example, you probably don’t want to establish a Roth IRA with your self-directed custodian and transfer traditional IRA money from your current custodian — you’ll pay tax on the entire amount transferred.

Self-Directed 401(k) Plans for Small Business

If you have money in a traditional IRA and you are self-employed (or if you’re the only employee other than your spouse), you may want to establish a 401(k) Plan with your new custodian sponsored by your company. You can roll traditional IRA money into a separate account inside the 401(k) and direct the investment of it.

Here are some things to consider in whether to establish a 401(k):

  • The contribution limits to a 401(k) are much higher than the limits applicable to IRAs and Roth IRAs.
  • 401(k) plans are not subject to the tax on debt financed income, so if you plan to buy real estate with debt financing, your account won’t end up paying tax on the debt financed portion of the income.
  • 401(k) plans are ERISA plans. You will likely end up being the “fiduciary” of the plan, which adds an additional level of responsibility you won’t have as an IRA owner.
  • Establishing a 401(k) can be much more complicated. Your company has to adopt a “plan” (often a prototype plan offered through the custodian) and there is more documentation.
  • You should have a third party administrator to prepare and file annual reports to IRS and the Department of Labor (like other ERISA plans), so be prepared for some extra expense and complication annually.
  • Many custodians and administrators don’t offer them.

Designate a Beneficiary

Whatever type of account you establish, though, be sure to pay attention to the important step of designating a beneficiary. If you forget to designate an individual beneficiary, your account agreement may default to having your “estate” as the beneficiary, and that can have some serious adverse tax consequences for your ultimate beneficiary.

Most custodians today allow you to sign up for a new account online, so that makes the process fairly simple.