IRA custodians manage the paperwork, payments and records for your IRA and help protect you from fees and extra charges. To receive the benefits of a tax-advantaged savings account or annuity, an IRA must be in the hands of a qualified custodian. Possible custodians include brokerage firms, banks, trusts, savings and loan associations, credit unions and any other IRS regulated firm that handles money for clients.
A custodian handles just about everything regarding your IRA from paperwork and account documentation to income distribution. In order to keep you, the account-holder, safe, the custodian puts the IRA in their company name and holds it for you. That way, you need to run any decisions past your custodian to keep from paying extra fines or taxes. Keep in mind that although their job requires them to prevent you from making major legal mistakes, responsibility for final decisions, and any related costs or profits, rests with you, the account holder.
Referred to as a fiduciary, your IRA custodian protects all your account assets and keeps them in your best interest. They require your permission to buy or sell any securities -- like stocks, bonds or mutual funds -- and cannot combine your money kept in savings with any of their own assets. However, their duties do not include making sure your investments profit or guaranteeing any account that would not otherwise be insured. Read any educational material you find because you pay the price for any income loss and other charges that result from your decisions.
Having a custodian does not remove you from the information loop. The IRS requires them to send you regular account statements listing all purchases and sales as well as how your assets are valued. Guaranteed contract investments must show projected amounts for ages 60, 65 and 70, which allows you to track your income and plan for the future. Regulations as of January 2002 require additional reports, both to the IRA holder and the IRS, detailing any amounts you withdraw as well as what you are required to withdraw after age 70 1/2.
Custodians don’t have the authority to make financial decisions about your IRA without your permission. IRA owners must sign forms waiving the liability of their custodians for any decisions the owner makes regarding investments. Custodians of self-directed IRAs don’t serve as fiduciaries and are prohibited from making any transactions not directed by the owner. In fact, if custodians make discretionary decisions for which they do not have the authority, they become responsible for all applicable taxes including excise tax penalties related to their decision.
Things to Consider When Choosing Your IRA Custodian
Controlling a self-directed IRA correctly requires a lot of work, so make sure you pick the right custodian to help. Compare a few companies to determine your best option based on history, service and benefits as well as cost. Make sure you get form 5305 from your administrator and stay away from any custodian who doesn’t provide that form, since it proves the administrator and custodian have an existing relationship. Finally, make sure they don’t try to sell you anything: the custodian’s job is to provide education only and not to disparage other custodians or push particular investments or purchases on you.
- FDIC.gov; Trust Examination Manuel; April 2008
- Market Watch; Friend to the End: You and Your IRA Custodian Have Duties To Uphold; Clifton Linton; August 2001
- Pensco Trust Company: How to Choose an IRA Custodian
- Ephren Taylor Entrepreneur; The Role of an IRA Custodian; Ephren Taylor; October 2008
- Self Direct Online: Custodian
- The Entrust Group; Choosing an IRA Custodian or Administrator for Self-Directed IRAs; 2011