An IRA trustee, also known as a custodian, is the institution that manages your retirement account. By law, each individual retirement account must have a custodian or a trustee. Currently, the majority of approximately 50 million IRAs invest in traditional asset investments. Technically, any IRA in which you make all investment decisions is “self-directed”.
However, in the financial services sector, a self-directed IRA usually means an IRA in which the custodian allows you to invest outside the more traditional world of stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Unless you are comfortable with a robo-advisor, the availability of knowledgeable specialists to answer your questions online or by phone is very important. There is nothing more frustrating (especially if you administer a self-directed IRA) than receiving incomplete or confusing answers to your questions. When opening an IRA, it's important to ask yourself several questions before choosing a custodian.
Do you prefer a traditional or Roth account? Or both? Are you satisfied investing in CDs, mutual funds, stocks and bonds or do you crave the most adventurous options available with a self-directed IRA?. The advantage of the IRA trust is that distributions are controlled by the trustee rather than the beneficiary. The trustee, of course, can withdraw more than the required distribution from the IRA at any time he wants. The growing popularity of self-directed IRAs has increased the number of custodians, administrators and promoters offering self-directed investment options.
As more self-directed IRA providers fill the market, it's more important that you research potential providers to ensure you have the utmost confidence in managing your account. It's also important that you understand what you should know, look for, and ask any potential self-directed IRA provider before investing. All IRAs must be held by a custodial entity, such as a bank, a credit union, a trust company, or an entity authorized and regulated by the IRS as a “non-bank custodian.”. When choosing a self-directed IRA custodian, you should be comfortable with their industry experience, knowledge and customer service.
When selecting a self-directed IRA custodian, know that your industry experience is important to building trust in your services. Your financial future is in the hands of the custodian; you should be careful if you have limited experience. Self-directed IRA custodians are considered a directed custodian and therefore do not provide investment advice. However, a competent custodian must have a superior industry knowledge base.
IRA custodians must meet IRS requirements to have the authority to own title to their clients' assets, investments, or property. Custodians must comply with all obligations to be allowed to issue funds, including issuing checks and issuing electronic transfers for funds in the account. In addition, custodians must allow oversight and requirements for audits by regulatory bodies. Self-directed IRA administrators and promoters are different from custodians and are limited in the services they can offer.
These firms do not meet the requirements of the IRS to be a custodian or trust and cannot own assets or issue funds. Managers or promoters are only responsible for marketing and sales, data entry, return production and basic reporting. To complete transactions, a self-directed IRA administrator must establish a relationship with a self-directed IRA custodian or trust that is authorized to withhold IRA funds and investments. A manager or promoter must pass investor funds to and from a custodian to complete transactions.
With little oversight needed for self-directed IRA managers and promoters, having an extra step to transfer funds back and forth could be risky for investors. 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. The custodian acts as the basic supervisor of the account and is also responsible for functions such as sending ROI statements and buying and selling investments for the IRA.
It's important to note that only custodians are authorized by the IRS to hold, or “guard,” your IRA assets. Which is important, because that means that if the IRA owner is incapacitated, the trustee has the authority to continue to manage and supervise the IRA, including making prudent investment decisions, executing the required minimum distributions, etc. As noted above, with a custodial IRA, the role of the financial institution is literally to hold and hold custody of the IRA's assets. A self-directed IRA is an IRA in which you choose the methods and instruments of financing and allows you to expand your investment options.
That's why, in most cases, it's best for the trustee to take the required minimum distribution from the IRA each year and distribute it to the beneficiary. However, in financial services, an SDIRA is simply an IRA in which custodians allow the account owner to perform discretionary control to invest in investment products other than stocks, bonds, and traditional mutual funds. Banks are an option when account owners prefer to have FDIC-insured securities, such as certificates of deposit (CDs) or money market mutual funds in the IRA. A trust IRA is a form of individual retirement account in which the financial institution holding the IRA operates it as a trust (for which the institution acts as a trustee), rather than simply as a custodial account held by the institution.
This distinction, between whether the IRA is literally controlled by the owner of the IRA (with the financial institution as the custodian) or whether the IRA is controlled by a fiduciary document (in which the financial institution is a trustee and receives instructions from the IRA owner), may seem like a minor nuance. but it has important differences. But a trust as a beneficiary of an IRA can also be structured as an “accumulated trust,” in which the entire IRA, including not only the value of the IRA account, but also all post-death RMDs, can be accumulated within and controlled by the accrual trust. The reason is that a fiduciary IRA is effectively like a trustee beneficiary of an IRA, in which all RMDs are automatically transferred to the underlying beneficiaries.
A bank is an option if you want to enjoy the FDIC-insured security of CDs or money market funds within an IRA. 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. Traditional IRAs and Roth IRAs can be managed by the investment firm holding the IRA or they can be self-directed. In fact, by default, an IRA must be structured as a trust account under IRC Section 408 (a), although a custodial account can be treated as a trust account (and meet the requirements of the IRA) under IRC Section 408 (h).