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Fee Comparison: Self-Directed vs Brokerage Firm IRAs

If you are not familiar with the retirement industry, choosing the right IRA company, or custodian, that will help you achieve your investment goals can be confusing. Most of this confusion stems from the way IRA companies/custodians’ market themselves to differentiate the services and investments they are able to custody on behalf of their client’s IRA accounts.

In this fee comparison segment, we are going to clear the air on the difference between Self-Directed IRAs and brokerage firm IRAs.

What are Self-Directed IRA accounts?

Per IRS regulations, a “Self-Directed” IRA account is no different than any other IRA account - it maintains the same tax-shelter benefits, contribution limits, etc. The main difference is that this type of IRA account enables you to invest in alternative investments, such as real estate, oil & gas, cryptocurrency, precious metals, and much more.

The companies that custody this type of IRA, like Preferred Trust Company, are only licensed to custody alternative assets, and do not provide any investment advice. This means you cannot invest in publicly traded assets (stocks, bonds, mutual funds) and it is up to you to research and perform due diligence on the alternatives you want to invest in - hence the emphasis on “Self-Directed” IRA.

How is it different from my brokerage firm IRA account?

You may be thinking, “I already ‘self-direct’ the investments in my retirement account, so can’t I just use my current IRA to invest in alternative assets?”. It is not that simple.

It is more common for a person to have an IRA account that can invest in “conventional” investments, such as stocks, bonds, and mutual funds. These IRA accounts are typically held with your household name brokerage firms like Charles Schwab, Fidelity, ETrade, etc. Brokerage firms are licensed to offer these investments to IRA account owners on their exchange platform online.

How does this difference affect the way fees are collected?

Brokerage Firms: Don’t be fooled by the “free” IRA

Brokerage firms are notorious for advertising their IRA accounts as “free”. Yes, considering everything is completely automated; everyone is investing in the same stocks, bonds, mutual funds; and typically, the only transactions that occur are the purchase, sale, and, depending on the asset, dividend payments – brokerage firms can afford to charge little to no administrative fees for IRA accounts.

However, brokerage firms still collect fees through the commission percentages they earn from the returns on your investments or per trade transactions that you make.

Self-Directed IRA custodians: They don’t make money off your investments

Each alternative investment transaction that Self-Directed IRA account holders engage in is unique to that IRA. No one IRA is purchasing the same type of gold bullion or coins from the same precious metals dealer and stored at the same depository every single time. No one IRA is purchasing the same rental property. No one IRA is investing in the same type and amount of cryptocurrency.

Each alternative asset has its own unique investment process and regulations that must be met. Alternative assets, such as rental properties, generally experience well over 1 – 2 transactions per month.

Due to the unique nature of these investments, it takes a team of IRA specialists to facilitate and administer these transactions on behalf of the IRA account. The nuances of these investments make it impossible to completely automate any part of the process.

Couple this with IRS regulations that prohibit Self-Directed IRA custodians from taking a fee from the income generated from the investments, the custodians must collect annual administrative fees. Without the ability to generate revenue, there would be no Self-Directed IRA custodians in business to provide retirement savers like you with the opportunity to tax-shelter your alternative investments.

This is why, on the surface, Self-Directed IRAs seem to be more costly. However, it is important to keep in mind that there is a difference between administrative fees charged by the custodian for their services and fees/costs associate with the investment. Administrative fees can be paid out of pocket, allowing you to preserve your tax-deferred/tax-free returns.

Let’s put this into perspective with some numbers.

Cost of IRA to Income Ratio

In this example, the IRA is investing in Trust Deeds that yield a 10% annualized return. The fees reflect Preferred Trust Company’s current fee schedule. The income generated is tax-deferred or tax-free depending on the type of IRA account.


It is your responsibility to determine if your tax-sheltered investment returns, in combination with your IRA contributions, will make a Self-Directed IRA account a worthwhile investment for your overall retirement strategy.

Can you really make a fair comparison between a Self-Directed IRA and a brokerage firm IRA?

No. As you can see, it is like trying to compare apples to oranges.

Is it common to manage two IRA accounts?

Yes. Considering the minimal cost of the brokerage firm IRA, many clients utilize both types of accounts to diversify their portfolio. This provides clients with the flexibility to strategically move and deploy funds as markets fluctuate.

Is there a way to consolidate to one IRA account?

Yes. Clients that are a bit more hands-on with their investments can consider establishing an IRA owned LLC. This gives clients checkbook control over their IRA, enabling them to establish a brokerage account to invest in publicly traded assets while also maintaining the ability to direct investments into alternative assets.

To learn more about the responsibilities of an IRA LLC, take a look at this blog. Preferred Trust Company provides a service to help clients establish the IRA LLC, schedule a consultation to learn more!

Are you interested in adding a Self-Directed IRA to your retirement strategy?

Do you already have an alternative investment that you would like to reap the benefit of tax-deferred or tax-free returns? Schedule a no obligation consultation with one of our IRA professionals to learn more about Preferred Trust Company, or get started with an online application today!

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