Net of Fees

by Peter Rizzo

Life Settlements in a Retirement Account? Think Again.

This week a conversation I had with a prospective client stuck with me and I thought I’d share. After looking at his self-directed custodian’s fee statement for last year, he realized an investment he had that went south (highly speculative real estate development), was being charged custodial fees for the highest value rather than the value it is today.

When he reached out and asked the custodian, he was told that he could re-evaluate, but the FEE for that would be greater than the savings (which was substantial).

Warren Buffet has been a crusader against the fees of Wall Street for years and in this year’s letter to shareholders, said this:

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”

So, my message is, that if you have a self-directed IRA or for that matter, an IRA that is charged a percentage of value, find out what that percentage is and when it’s calculated. If you are holding a commodity that can change daily, are you being charged the high or low value for the day or month? Are you being charged a flat fee for management and then a fee for gains? Your real return is profit NET of Fees.

The simple solution is to always have a custodian of your accounts that charges a flat rate and can be easily calculated. This is the only way to be sure you know your real rate of return.

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    1. Dennis James Gudenau

      How does an LLC work in conjunction with a solo 401k. Simply, if I take out $200k in funds to invest in my LLC and generates income that goes back into the solo 401k where do the expenses get booked from a tax perspective if all my income went back into the solo account?

      • G Witt

        Dennis, typically if the funds (from a 401(K)) were invested in an LLC the fees should come out of the income that you are receiving or effectively your 401(K). For example, let’s say your 401(K) invests $200K in an LLC that then purchases a rental home. The expenses for that rental home (e.g., property taxes, rental license, etc.) should be coming from within the LLC and effectively reduce the income that comes back to your 401(K). There are other situations which can impact how this is handled (including if the LLC is an active business which could precipitate UBIT), but in general that is the concept.

      • Bob

        I’d like to know also.