An IRA is a custodial account and requires a custodian to maintain their tax advantage status. The custodian ensures that all investments are approved by the Internal Revenue Service and also completes all reports and documents required for the tax authority. Custodians are essential in any individual retirement account (IRA) agreement to maintain tax-deferred or tax-free status. Custodians, also called trustees, are different depending on the type of IRA.
Marketable securities, such as mutual funds or stocks, do not require any effort to choose a custodian; however, IRAs that have alternative investments such as private notes, precious metals, or real estate need a self-directed IRA custodian. An IRA custodian is a financial institution that holds the investments of an account for safekeeping and ensures that all IRS and government regulations are complied with at all times. A custodian is needed for any IRA. The custodian of a self-directed IRA is going to be different from the normal custodian.
You can't go to one of the big box stores like Edward Jones or Charles Schwab and have a truly self-directed IRA. They have accounts that they call self-directed, but in reality, you are allowed to buy from a fixed menu of investments they have created for you. An IRA depositary, such as the Pacific Premier Trust, is a highly regulated bank, credit union, or non-depositary bank that is allowed to hold assets in an IRA. Both the state and federal governments supervise custodians, and there are strict policies, procedures and internal controls in place.
An Individual Retirement Account (IRA) provides investors with certain tax benefits for retirement savings. Some common examples of IRAs include the traditional IRA, the Roth IRA, the Simplified Employee Pension (SEP) IRA, and the Employee Savings Incentive Plan (SIMPLE) IRA. Custodians maintain all IRAs for investors. Custodians may include banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) to act as custodian of the IRA.
Most IRA custodians limit holdings in IRA accounts to company-approved stocks, bonds, mutual funds and CDs. Self-directed IRAs require a specialized custodian because they allow investments beyond publicly traded assets such as stocks, bonds, and funds. All self-directed IRA custodians are legally prohibited from offering investment advice or recommendations to their clients. Typically, banks, brokerage firms, mutual fund companies and trust companies are the custodians of traditional and Roth IRAs.
They limit IRA assets to relatively less risky investments, such as mutual funds, exchange-traded funds, bonds and publicly traded stocks. For SDIRA investors, adding alternative investment opportunities, including real estate and private companies, has the potential to increase profitability, as these are riskier assets. Traditional IRAs and Roth IRAs can be managed by the investment firm holding the IRA or they can be self-directed. The only advantage of using a mutual fund as the custodian of an IRA is that these companies allow account owners to invest in mutual funds or ETFs.
Since these platforms do not involve human interaction, fees and other expenses that generally make the return on IRA investments lower are often non-existent. A brokerage could be the IRA of your choice, if you like the idea of investing in individual stocks or bonds, as well as mutual funds or ETFs. Self-directed IRAs allow you to invest in a broader and potentially riskier portfolio of assets than other types of IRAs. Facilitators are placed in the early part of the IRA owner's new account process to help them navigate rules and implementation.
As alternative investments are more complicated for custodians to safeguard, administrators and facilitators have become a liaison between the IRA account holder and the custodian. After all, the responsibility for a self-directed IRA should be in the hands of the individual account owner. Self-directed IRA custodians are considered a directed custodian and therefore do not provide investment advice. Below are some important questions that will help you identify the right custodian for your self-directed IRA.
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