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There are several types of Individual Retirement Arrangements (IRAs). The holder of these accounts is obligated to meet all the requirements set out by the IRS regarding rules and regulations. You will always need a custodian no matter the account type you are considering opening. The custodian will keep the investments in your account and make sure all regulations and rules are met.
What Is an IRA Trustee or Custodian?
Custodians, sometimes known as trustees, are financial institutions or companies that are trusted with the assets you hold in your IRA. They can be banks, brokerages, or specific companies with the main purpose of acting as custodians. Whether you are considering a Roth IRA, Traditional IRA, or other type you will always need to go through an IRA Custodian.
Do All IRAs Have Custodians?
Yes, all IRAs are obligated by the IRS to have their assets held by a custodian for safe-keeping and regulatory oversight. The type of custodian will also depend on which IRA you are going to open, certain differences apply to custodians for Self-Directed IRAs. More on that later.
Why Do You Need a Custodian For an IRA?
To answer the question, it’s necessary to understand the role of a custodian. Apart from the IRS mandate that requires all IRAs to have a custodian, these institutions serve as monitors and a guarantee of IRS compliance.
If it weren’t for custodians the IRS would have to monitor every single IRA, which would in all terms be impossible. In general standings a custodian is:
- A licensed financial institution or brokerage house.
- Acts as a fiduciary but not a financial advisor.
- Keeps tax records for Self-Directed IRAs and reports to the IRA as required by law periodically.
- Assists in purchasing assets allowed within the account.
- Makes distributions.
Can I Be My Own IRA Custodian?
Currently, and it doesn’t seem like it will change, the IRS requires a third party to act as the custodian of your IRA. They can be banks and insurance companies, or approved nonbank custodians.
What Is an IRA Custodian Fee?
IRA custodian fees are the charges the company managing your IRA makes to cover costs for the bookkeeping and running of your account. Statements and information they might send have a cost in shipping and printing. Commissions also apply when you sell and buy assets.
Some online brokerage houses charge very competitive rates or may even waive the fee altogether when a minimum balance is kept in your IRA. Banks may also forfeit this fee for customers that also have a savings or checking account.
The custodial fee is not the same as a sales fee, which in some cases can be as high as 5%. The sales fee is charged when investors want an advisor to select funds or stocks for them. If you are confident in picking your own investments, ask for a no-load account. With this type of account, you will only be subject to custodial fees.
The good news, under specific circumstances custodial fees are tax-deductible. You can deduct custodial fees if you itemize deductions using Schedule A, and the total of your expenses is greater than 2% of your gross income. The IRS does not allow you to deduct these fees if they are paid out of the IRA. You must pay them out of pocket for you to deduct these fees.
Types of IRA Custodians
The choice of custodian for your IRA will depend on which type of account you choose to open. If you are planning on investing in traditional assets such as stocks, bonds, and mutual funds your go-to choice will be a bank, brokerage firm, or other financial institution.
If you are also going to invest in alternative assets, you will need to open a Self-Directed IRA. In this case, there are specialized firms that have specific experience in the assets you are going to invest in. These companies may prove a better choice given the complex nature of regulations in the alternative asset space.
For Non-Directed IRAs
Banks are a typical option for IRA holders who want to invest in traditional assets. You will also have your cash investments such as CDs, money market funds, and cash covered by FDIC insurance. The bank where you hold your checking or savings accounts should offer custodial services for IRAs simplifying the process.
A brokerage firm may be a better choice if you are going to pick your own stocks, bonds, or mutual funds. Despite the terminology Non-Directed IRAs still allow you to choose which investments you wish to hold.
Mutual funds can open an IRA for you to invest in funds or ETFs offered by the firm. This may be a convenient arrangement if the funds offered cover all your needs, as you will not be charged load fees.
Insurance companies usually sell flexible premium annuities, these can be fixed or variable. These plans offer account value protection, death benefit protection, and automated account management. However, IRAs already provide a tax-advantaged environment, so the tax advantages of annuities are not indispensable within an IRA.
Robo-Advisors provide automated, online, algorithmic portfolio advice. These platforms do not rely on human intervention, so fees and expenses are reduced to a minimum. This option is relatively new; however, it may prove to provide higher returns in the long run. Typical IRA custodian fees and expenses may eat into the long-term returns of your investments.
For Self-Directed IRAs
Banks and brokerage houses can act as custodians for Self-Directed IRAs also, but they may lack specific proficiency in the investments you are considering. For Self-Directed IRAs, the choice will usually fall on a company that is dedicated to operating services as a custodian for IRAs.
These companies know all the ins and outs of what investments are allowed and which ones are not. The IRS has several types of alternative investments prohibited within an IRA, as well as other activities which might generate income.
Penalties and fines can be very hefty on prohibited transactions or investments within an IRA. A custodian with experience in the field will help guide you through the maze of illicit activity, which you may incur without their help.
Administrators or facilitators are also able to help you run a Self-Directed IRA. These figures act as an intermediary between the custodian and the IRA holder. The IRS requires that only approved custodians can act on behalf of the IRA holder.
The administrator is usually a small company that pushes the IRA-owned LLC in exchange for a fee. They also do the work of the custodian; however, the custodian has the responsibility of auditing everything.
How to Choose an IRA Custodian
When choosing a custodian for your IRA these are the aspects you want to consider before making your choice. Some banks and brokerage firms only work with one custodian. This exclusivity might not be a problem if you are only going to invest in traditional assets. However, you should still check out these features as you might find a more convenient setup by shopping somewhere else.
Wide Investment Selection
Self-Directed IRA holders are clearly looking to diversify their investments with alternative assets. The custodian should offer the capability to reach all the assets you wish to invest in with your IRA. Although it may be more effective to go for various IRAs to allow for specialized services in each asset class.
Similar considerations can be made for Non-Directed IRAs. Even if you are going to invest in traditional assets, the custodian should offer ample enough choice in which stocks, bonds, and funds you can invest in.
Restricted Investment Options
Look out for custodians that restrict the types of investments that you can make due to their company policy. IRS restrictions must be observed, but you shouldn’t be limited by the restrictions imposed by your custodian.
IRA custodian fees can vary greatly from one company to another. Check all rates concerning maintenance fees and transaction fees. If you are using a fund, you can avoid load fees when you buy products managed by the fund as they won't have to buy the shares from a third party.
Nowadays the convenience of online transactions is a must. The custodian of choice should have a solid platform where you can make and monitor your investments with ease. Even before making a transfer of funds, you should be able to navigate their website sufficiently to determine if it’s a good fit.
Excellent Customer Service
If you are not going for a Robo-advisor, the custodian should offer forms of communication that satisfy your needs. Telephone and email have been the preferred channel of choice for a while, more recently some custodians are adopting the online chat feature directly on their platform.
You also need to evaluate that the staff answering your queries are well informed, especially if you are managing a Self-Directed IRA. In this case, it can prove frustrating when you are not supplied with complete and understandable information promptly.
Some financial advisors advise consolidating various IRA accounts if you have more than one. Bringing all your IRAs under one account may improve cost efficiency, and certainly makes it easier to keep track of your investments. Seek a custodian that is well versed in all the rules regarding consolidation and is aware of which IRAs can or cannot be combined.
First of all, you need to decide which types of assets you will hold in your IRA. You may be considering only investing in traditional assets. However, we strongly recommend diversifying your portfolio with alternative assets such as gold and other precious metals.
Once you have defined your asset universe you can set about choosing the right custodian that is the best fit for you. Be sure they are experts in their field and have all the necessary knowledge and knowhow to give you the best service. You can learn more about IRAs that allow investments in gold and other assets in our complete Precious Metals Investor’s Guide.