Do Self-Directed IRAs Need a Custodian?
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Custodians for Individual Retirement Accounts can range from banks, credit unions, non-depository trust companies and brokerage firms – some even specialize in supporting more risky forms of investments like private placement securities and real estate.
Having a custodian is a good idea.
Self-directed IRA investors must select an IRA custodian that best meets their investment requirements. Find one that enables a wide array of investments such as real estate and private placements at competitive fees; seek one who belongs to the National Association of Securities Dealers with proven expertise at keeping assets safe.
Evaluations should also consider customer service reputation, particularly with regard to prompt responses to inquiries and processing transactions quickly and accurately. Furthermore, inquire into any extra fees they might impose such as account setup or annual maintenance charges as these could have an effect on overall investment returns.
Make sure that the custodian you select understands all of the rules and regulations associated with your type of retirement plan, such as an IRA that invests in operating companies or debt-financed real estate investments; such investments could potentially produce unrelated business taxable income (UBTI) or unrelated debt-financed income (UDFI), and your custodian should provide clear guidelines on how best to handle them to avoid incurring IRS penalties and taxes.
Fraudsters have been known to misrepresent themselves as IRA custodians to sell fraudulent investments, while legitimate custodians only serve to hold and administer assets within accounts; they do not give investment advice or recommend specific investments. It’s essential that when selecting a custodian, care should be taken to verify they are true fiduciaries and meet all required vetting procedures to avoid scams or fraudulent schemes. They should possess all required paperwork and documentation for being an approved Nonbank Trustee and Custodian with the IRS as well as having an established track record. This step becomes especially crucial when handling more complex investments.
Having a custodian is not a good idea.
Custodians of traditional IRAs such as banks, brokerage firms, mutual fund companies and trust companies usually only allow low-risk investments such as publicly listed exchange-traded funds (ETFs), bonds and publicly listed stocks to be held within them. Furthermore, no services exist that would enable SDIRAs to invest in alternative assets such as cryptocurrencies, private placement securities or real estate shares.
Custodial firms that offer services for self-directed IRAs must first be approved by the Internal Revenue Service as an “Approved Nonbank Trustee and Custodian,” in addition to having a track record of stability, competence and experience in handling alternative investment assets like real estate, precious metals or cryptocurrency. Investors should take note of fees charged by different custodians; generally speaking it’s wiser to select those that charge flat annual fees rather than transaction-based charges.
Custodians that fail to properly vet investments and validate information provided should also be avoided, particularly those investing in alternative assets that are difficult to value such as private equity investments. An SDIRA that holds such investments should have access to verification procedures like third-party valuation experts or tax assessments records in order to assess prices accurately for its beneficiaries.
Investors should keep in mind that custodians do not provide financial or investment advice directly to account holders, nor any investment recommendations. Instead, account holders of an SDIRA bear full responsibility for conducting their own due diligence when selecting any investment before instructing their custodian to make it transaction. We highly encourage clients to work with an independent financial advisor or wealth manager who can assess individual situations and provide recommendations based on this understanding. In addition, account holders must review IRA rules to make sure any transaction they undertake doesn’t fall under IRS regulations.
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