Role of Self-Directed IRA Custodian

A self-directed IRA custodian acts as a passive, non-discretionary custodian for self-directed individual retirement accounts (IRAs) as defined in Section 408 of the Internal Revenue Code. As a passive custodian, the self-directed IRA custodian does not seek investments or offer advice or recommendations regarding investments held in the IRAs. The self-directed IRA custodian is not authorized to make any decisions or take actions related to the investments in the IRAs unless explicitly instructed by the IRA owner.

The role of a self-directed IRA custodian is distinct within the financial services sector. Unlike a broker or investment advisor, they do not engage in selling or providing advice on investments, assess their appropriateness, or conduct due diligence for IRA owners. However, what they do focus on is carrying out investment instructions issued by the IRA owner, along with fulfilling various administrative and custodial responsibilities. These tasks are crucial for maintaining the tax-deferred status of an IRA and effectively managing the account and its assets.

The duties of the Custodian and the limitations on its responsibilities can be found by conducting a careful reading of the IRA agreement. The bullet points provided below aim to enhance your comprehension of the role of a self-directed IRA custodian.

What a Self-Directed Custodian DOES NOT DO:

Act as an investment advisor, tax advisor, or legal advisor
Provide investment, tax, or legal advice
Recommend or endorse investments (agreeing to custody an investment is not an endorsement or approval of the investment)
Recommend or endorse investment advisors (working with an investment advisor selected by the account owner is not an endorsement or approval of the investment advisor)
Determine the fair market value of account investments (reporting of the valuation submitted to the Custodian by the investment sponsor does not constitute a representation by the Custodian that the reported value is accurate)
Perform due diligence for the account owner on any investment or investment sponsor
Determine the suitability of any investment for the IRA or the account owner
Determine whether a transaction would be deemed a Prohibited Transaction as outlined in Internal Revenue Code section 4975 (26 USC § 4975)

What a Self-Directed Custodian DOES:

Maintains IRA agreement and forms subject to the Rules and Regulations of the Internal Revenue Service and the U.S. Department of Labor
Processes applications to establish IRAs
Implements and follows an Anti-Money Laundering (“AML”) program, as well as policies and procedures to comply with the Bank Secrecy Act (“BSA”), the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“US PATRIOT Act”), Financial Crimes Enforcement Network (“FinCEN”) guidelines, the office of Foreign Asset Control (“OFAC”) regulations, and Anti-Terrorist Financing (“ATF”) laws and regulations
Accepts, documents, and records contributions, transfers, and rollovers from other IRAs/retirement plans
Implements technology and procedures to protect the privacy of account owner and account data
Executes account owners’ investment instructions as directed by sending funds from the IRA to the client-selected investments
Gathers, executes, and holds documents such as subscription agreements, operating agreements, offering memorandum, promissory notes, certificates, and other evidences of ownership of investments by the IRA
Receives and records income from the assets held in the IRA
Executes account owners’ instructions to sell, withdraw from, or liquidate investments held in the IRA
Coordinates with investment sponsors the purchase and sale/liquidation of investments as directed by account owner
Facilitates, as directed by the account owner, distributions from the IRA to the account owner or transfers to other IRAs or retirement plans
Performs tax reporting of IRS Forms 1099-R and 5498 as required by the IRS
Provides IRA statements to the account owner which includes transactions and cash and assets held in the account
Complies with all applicable State and/or Federal Regulations governing IRA Custodians

Important Factors to Consider When Selecting a Self-Directed IRA Custodian:

A custodian is required for all IRAs
The difference between custodians, administrators, and promoters
Experience, knowledge, and service are critical
True value for services

It is important to feel at ease with the industry experience, knowledge, and customer service of the self-directed IRA custodian you select.

Experience

Having knowledge about the industry experience of a self-directed IRA custodian is crucial for establishing trust in the services they provide. As your financial future relies on the custodian, it is advisable to exercise caution if they possess inadequate experience.

Knowledge

Custodians of self-directed IRAs are classified as directed custodians, which means they do not offer investment advice. Nevertheless, a proficient custodian ought to possess extensive knowledge in the field. This knowledge should be evident in all employees, ranging from those in sales and marketing to client service and operations. The custodian must be capable of supplying comprehensive yet comprehensible materials about self-directed IRAs, drawing from credible sources.

Service

When it comes to any business partnership, it is crucial to prioritize the quality of service. Right from the initial contact, your engagement with a self-directed IRA provider should exhibit friendliness, professionalism, expertise, effectiveness, and reliability.

True Value

Every custodian imposes fees, so what benefits and services are you getting in return for these fees? The fees charged and their structures differ among providers, and it is important to be cautious of firms that are hesitant to talk about fees, attempt to squeeze additional money from you, or have undisclosed fees. Understanding the fees and how they might affect your account is crucial.

Difference between Self-Directed IRA Custodians, Administrators or Promoters

Custodian

In order for IRA custodians to have the authority to possess their clients’ assets, investments, or properties, they must comply with the IRS requirements. To be permitted to issue funds, such as writing checks and issuing wires for account funds, custodians must fulfill all their obligations. Furthermore, custodians must allow for regulatory bodies to conduct audits for oversight and compliance purposes.

Administrator or Promoter

Administrators and promoters of self-directed IRAs differ from custodians, as they have limitations on the services they can provide. These companies do not meet the necessary IRS requirements to be considered custodians or trusts, thus they are unable to hold asset titles or issue funds.

The duties of administrators or promoters solely encompass marketing, sales, data entry, statement production, and basic reporting. In order to carry out transactions, a self-directed IRA administrator must establish a partnership with a self-directed IRA custodian or trust that holds authorization to oversee IRA funds and investments.

Investor funds must be transferred to and from a custodian by an administrator or promoter in order to carry out transactions. Given the lack of necessary supervision for self-directed IRA administrators and promoters, this additional process of transferring funds could pose risks for investors.