An IRA custodian is a financial institution that is authorized by the IRS to provide custodial services and hold assets on behalf of IRA owners. According to IRS rules, an IRA must have a custodian bank, which can be a bank, a mutual fund company, or a brokerage firm. The IRS requires that your IRA have a custodian. It is the responsibility of the custodian bank to execute the investment decisions made by the IRA owner and to ensure that all investment inquiries and account activities are carried out in accordance with regulatory requirements set by the IRA.
Technically speaking, any IRA where you make all investment decisions is “self-directed.”. In the financial services industry, however, 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’re familiar with a robo-advisor, the availability of knowledgeable specialists to answer your questions online or over the phone is very important. Nothing is more frustrating (especially if you’re managing a self-directed IRA) than getting incomplete or confusing answers to your questions.
When opening an IRA, it’s important to ask yourself a few questions before choosing a custodian. Do you prefer a traditional account or a Roth account? Or both? Do you enjoy investing in CDs, mutual funds, stocks, and bonds, or are you longing for the more adventurous options that a self-directed IRA offers? An individual retirement account (IRA) offers investors certain retirement savings tax benefits. Common examples of IRAs include the traditional IRA, the Roth IRA, the Simplified Employee Pension (SEP) IRA, and the Savings Incentive Match Plan for Employees (SIMPLE) IRA.
All IRA accounts are managed by custodian banks for investors. Custodian managers may include banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) as an IRA custodian. Most IRA custodian banks limit IRA account holdings to company-approved stocks, bonds, mutual funds, and CDs. Despite the risks posed by self-directed IRAs, investors can take a number of steps to reduce the risk of fraud.
Custodian banks are not hard to find, but in order to choose the best and right one, the owner must decide what type of investments to make in the account. That means looking for a custodian bank that is familiar with the consolidation rules and understands which types of IRAs cannot be combined. Both administrators and moderators can act as intermediaries between the IRA account holder and the partner custodian that holds the assets. Roth IRAs are retirement accounts where the owner pays tax on the money deposited into the account (contributions after tax) and then all withdrawals are tax-free.
The SEC’s Office of Investor Education and Advocacy is publishing this Investor Alert to warn investors about risks associated with self-directed individual retirement accounts (self-directed IRAs). All self-governing IRA custodian banks are legally prohibited from offering investment advice or recommendations to their clients. When choosing a self-directed IRA custodian, it’s important to know their industry experience to build trust in their services. Unless the account holder prefers a robo-advisor, IRA specialists from most custodian banks are knowledgeable professionals available to account holders.
Self-directed IRAs allow investments in a wider and potentially riskier investment portfolio than other types of IRAs. The two main types of IRA accounts set up by individual investors are the traditional IRA and the Roth IRA. It’s important to note that some states don’t allow administrators to manage IRA accounts in this way on behalf of the custodian. Watch out for custodian banks that restrict your investment options based on the nature of their statutes.
All IRAs must be held by a custodian such as a bank, credit union, trust, or company licensed and regulated by the IRS as a “non-bank custodian.”