Due to the increasing popularity of self-directed IRAs, there has been a rise in the number of custodians, administrators, and promoters who offer self-directed investing options. With the expanding market of self-directed IRA providers, it becomes crucial for you to thoroughly research potential providers to ensure that you have complete trust in the management of your account. Moreover, it is essential that you familiarize yourself with the necessary information, criteria, and inquiries to make regarding any potential self-directed IRA provider before making any investments.
A Custodian is Required for All IRAs
A custodial entity such as a bank, credit union, or trust company must hold all IRAs. It can also be an entity licensed and regulated by the IRS as a “non-bank custodian.”
To establish an individual retirement account in the United States, a trust or custodial account must be created exclusively for your benefit or that of your beneficiaries. The account is formed through a written document which should demonstrate compliance with all the designated criteria.
To act as a trustee or custodian, the individual or entity must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS.
IRS Publication 590 emphasizes the importance of thinking systematically when evaluating a particular situation and advises against introducing new information or omitting existing information while rephrasing a given text.
Experience, Knowledge, and Service
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
When selecting a self-directed IRA custodian, it is important to feel at ease with their level of industry experience, expertise, and quality of customer service.
Experience
It is important to consider the industry experience of a self-directed IRA custodian when choosing one, as this is crucial in establishing trust in their services. Since the custodian will be responsible for your financial future, it is advisable to exercise caution if they possess only a limited experience.
Knowledge
Self-directed IRA custodians are categorized as directed custodians and therefore do not offer investment advice. Nonetheless, a capable custodian should possess an extensive understanding of the industry. The staff, ranging from sales and marketing to client service and operations, should demonstrate this expertise. The custodian should be capable of providing comprehensive, yet easily comprehensible, information about self-directed IRAs that cites authoritative sources.
Service
When it comes to any business relationship, giving high importance to the quality of service is essential. Right from the initial contact, your engagement with a self-directed IRA provider should be characterized by friendliness, professionalism, expertise, efficiency, and reliability.
True Value
All custodians impose fees, but it is crucial to comprehend the value and service you get in exchange for those fees. Providers have different fee schedules and structures, so it is wise to be cautious of firms that avoid discussing fees or engage in small, additional charges, or undisclosed fees. Understanding the fees and their potential application to your account is significant.
Difference between Self-Directed IRA Custodians, Administrators or Promoters
Custodian
In order to possess the authority to hold clients’ assets, investments, or properties, IRA custodians must comply with the IRS requirements. They are also obligated to fulfill all necessary conditions to issue funds, such as writing checks and issuing wires for account funds. Moreover, custodians must facilitate oversight and comply with audit requirements imposed by regulatory bodies.
Administrator or Promoter
Self-directed IRA administrators and promoters are distinct from custodians and have limitations in the services they can provide. These companies do not meet the custodian or trust criteria established by the IRS, preventing them from acquiring asset ownership or engaging in fund issuance.
Administrators or promoters have the sole responsibility of marketing and selling, entering data, generating statements, and providing basic reports. In order to carry out transactions, a self-directed IRA administrator needs to establish a connection with a self-directed IRA custodian or trust that has the authorization to hold IRA funds and investments.
Investor funds must be transferred to and from a custodian by an administrator or promoter in order to execute transactions. Given the limited oversight for self-directed IRA administrators and promoters, the inclusion of an additional step to transfer funds back and forth could pose risks for investors.
UNDERSTANDING THE ROLE OF A SELF-DIRECTED IRA CUSTODIAN
A self-directed IRA custodian acts as a passive custodian for customer-directed IRAs, also known as self-directed individual retirement accounts. This custodian does not actively seek investments or offer advice or recommendations regarding investments held in the IRAs. Without explicit instruction from the IRA owner, the custodian does not have the authority to make any decisions about the investments in the IRAs.
A distinct role is held by a self-directed IRA custodian in the financial services sector. Unlike brokers or investment advisors, they neither sell investments nor assess their appropriateness for the IRA owner. Instead, their main responsibilities include carrying out investment instructions given by the IRA owner, as well as fulfilling various administrative and custodial duties to ensure the IRA’s tax-deferred status and manage the assets.
By carefully reading the IRA agreement, you will find the responsibilities of the Custodian and the constraints on its duties. The bullet points and FAQs presented below are intended to assist you in gaining a better comprehension of the self-directed IRA custodian’s role.
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
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