When investing in self-directed IRAs, choosing an appropriate custodian is of vital importance. A great custodian should offer access to various investments including stocks and bonds as well as ETFs and mutual funds.
Financial advisors should also allow IRA owners to invest in alternative assets, and offer knowledgeable specialists who can answer questions online or by phone. Furthermore, account statements should make it simple and quick for account holders to verify information provided therein.
Fiduciary Duty
An IRA custodian is any financial institution that protects and reports on an individual retirement account’s alternative assets for safekeeping and IRS reporting purposes. Custodians include banks, brokerage firms, insurance companies and robo-advisors; when selecting one the owner should consider depth of expertise and service offered including fees charged (e.g. maintenance load trade commissions etc) as well as ease of using online platforms of companies to manage an account.
Banks may be an ideal option when the account owner needs FDIC-Insured investments such as certificates of deposit or money market mutual funds; however, they may be less accommodating for investments such as real estate or privately held businesses held through an IRA account.
Facilitators may be beneficial to IRA owners looking to invest in private investments like real estate or closely held businesses, acting as an intermediary between themselves and the custodian or administrator by helping navigate rules and implementation. However, such services come with their own set of disadvantages that should be carefully evaluated prior to engaging one.
Best Interest Contract Exemption
Custodians may be an attractive choice for self-directed IRA investors who wish to diversify their investments across many types of accounts, although it should be remembered that their primary role is holding and administering assets within accounts; their primary functions do not include investigating or validating investment assets, nor providing advice about them.
If you are considering opening a Self Directed IRA, make sure your custodian has been approved by the IRS. Also take into consideration what fees they charge for annual account maintenance fees, load fees (added onto mutual funds) and trade commissions.
Consider whether they allow private investments and have knowledgeable specialists available to answer your queries – this will help you decide whether they or one of the many robo-advisors becoming increasingly popular with self-directed IRA holders is your better option. Furthermore, examine their online site to see how easy it is to monitor transactions and get answers for any inquiries that arise.
Prohibited Transaction Rules
Custodians must ensure an IRA doesn’t engage in “self-dealing” transactions that could expose its owner to penalties of up to 15% or 100% depending on the nature of the transaction. Prohibited transactions occur if an IRA conducts business with any disqualified persons such as its own owner and/or their ascendants, descendants, spouse; fiduciaries of an IRA (financial advisors); and certain close family members.
When hiring a custodian, look for qualities such as:
Investment Advice Rules
Custodians may not provide investment advice or sell assets into your IRA; however, they still must abide by banking regulations and auditing requirements set by their state. Self-directed IRA custodians tend to be non-bank trust companies that have been authorized by individual states as custodians.
Custodians must also monitor IRA account holders to ensure they adhere to contribution limits and age requirements, and any early withdrawals or other violations reported to the IRS.
Some IRA custodians specialize in traditional investments like stocks, bonds and mutual funds; other custodians (known as self-directed) allow owners of self-directed IRAs to invest in alternative assets like real estate, tax liens or private company stocks. Self-directed custodians must ensure they only offer investments that have been approved by the IRS; advice cannot be offered for these investments and IRA owners must not invest with “disqualified parties,” such as their parents or spouse.
