What is a self-directed IRA custodian? What differentiates them from the other types of custodians? What are some of the qualities of a self-directed IRA custodian that you should consider when looking for one? In today’s article, I will guide you through some of the essentials of what self-directed IRA custodians are, and what you should expect when working with them. Read on to discover more about this topic.
An IRA custodian is an institution such as a highly regulated bank, credit union, or a non-depository bank that is allowed to custody investors’ assets held through an IRA ( Individual Retirement Account). Both the state and the federal governments oversee the activities of IRA custodians and have thus put in place very stringent policies, procedures, and internal controls, that are all meant to ensure that the IRA holders do not lose their assets to fraudulent IRA custodians.
Most IRAs only allow investors to hold traditional assets, which are mostly paper assets (bonds, stocks, ETFs, mutual funds, etc). There are, however, some other types of IRAs, known as self-directed IRAs, that give investors the freedom to invest in alternative assets such as precious metals and cryptocurrencies. The assets of such investors are usually placed under the custody of self-directed IRA custodians.
More on Self-Directed IRA Custodians
Those investing for their retirement years are required to hold their assets in any type of IRA, be it a Roth IRA, a traditional IRA, or a self-directed IRA. One of the reasons why this has to happen is to ensure that the investors follow the set contribution limits and that they meet all the other rules set by the IRS. This is why the IRA custodians also have to report any irregularities to the IRS. In 2022, for instance, no one is allowed to contribute more than $6000 to their IRA if they are under 50 years ( or more than $7000 if they are 50 or older).
In most cases, banks, brokerages, and other financial institutions such as mutual funds and Trusts serve as the custodians for most traditional and Roth IRAs. These IRA custodians limit the assets held in the IRAs to typically all the relatively less risky investments, which include paper assets, as already highlighted.
Financial institutions that offer self-directed IRA custodial services
Trust companies can also play the role of self-directed IRA custodians. In most cases, however, such companies tend to have a low profile. While they do not restrict the investors from investing in cryptocurrencies, gold, and other precious metals, private placement stocks, real estate products, etc., they generally provide fewer protections and do not offer any oversight. This arises from the fact that the responsibility of self-directed IRAs is meant to rest in the hands of their owners, and not the custodians.
Most people who open self-directed IRAs are, as such, quite sophisticated investors, or those who can afford to hire a financial advisor to help them build their wealth for the retirement years. The main benefit of taking this approach is gaining access to a wider variety of investment options, and being in a position to distribute the wealth in your portfolio without any limitations.
***Also read -What Can I Invest in With a Self-directed IRA?
What are the risks of working with Self-Directed IRA Custodians?
The Securities and Exchange Commission recently highlighted the imminent risks posed by the existence of self-directed IRAs. Self-directed IRA custodians are generally not responsible for the verification of the legitimacy of the investments held by the account owners, as well as the accuracy of the claims by the investors to hold certain assets.
They do not provide similar protection to those that other traditional IRA custodians provide to their customers. This has, for many years, created a window of opportunity for swindlers to take advantage of people’s lack of knowledge to rob them of their hard-earned money, claiming that they have already been vetted to act as self-directed IRA custodians.
You may also come across fraudsters who claim that they are IRS-approved custodians and that they can protect you against making losses. Some may even go the extra mile of recommending investments to customers. Legitimate self-directed IRA custodians do not do any of these things. They will, in fact, only hold and administer the assets held in the accounts, so if you come across any custodian being very vocal about offering you any advice to help you avoid losses, be very wary.
**Find out more on – Can You Use a Self-Directed IRA To Invest In Your Company Today?
How do you choose the right self-directed IRA custodian?
As earlier mentioned, all custodians, in their varying capacities, must be approved by the IRS. If you are getting started with investing for your retirement years, therefore, you should head to the IRS website, and check if the self-directed IRA custodians you have shortlisted are on the list of approved non-bank trustees and custodians. Not all the companies on that list are self-directed IRA custodians, but any genuine custodian must appear on it.
Upon checking the firms on the list, you will need to do some more homework to find out more details about them. You can for instance look up their licensing and registration details, using the resources provides by:
- Financial Industry Regulatory Authority
- State Regulatory agencies
You also need to go the extra mile to find out the quality of the services offered, by checking the:
- Fees (you need to confirm if there are any hidden fees)
- Customer support (are the support staff available at all times to help you deal with the issues that arise)
- Professionalism & expertise (Are the support staff well-versed with how self-directed IRAs work? Or do they guess their way through technical issues?)
You can know more about the above details, by simply checking what customers have to say about the self-directed IRA custodian of your choice on consumer trust sites such as Trustpilot, Better Business Bureau, etc.
There are many companies you can turn to when you are out to open a self-directed IRA, but I would recommend that you see what the companies below have to offer.
That will be all for this article on what a self-directed IRA custodian is all about. I hope you are now in a better position to open your self-directed IRA, with a better understanding of how your self-directed IRA custodian will serve you. Let me know whether you have more questions with regards to today’s post, as well as whether you would need help with the shortlisting of reliable self-directed IRA custodians.
I wish you well,
Eric, Investor and Team Member at Gold Retired!