Custodians are essential in any individual retirement account (IRA) agreement to maintain tax-deferred or tax-free status. Custodians, also called trustees, are different depending on the type of IRA. An individual retirement account (IRA) provides investors with certain tax benefits for retirement savings. Some common examples of IRAs include the traditional IRA, the Roth IRA, the Simplified Employee Pension (SEP) IRA, and the Employee Savings Incentive Compensation Plan (SIMPLE) IRA.
All IRAs are maintained by custodians for investors. Custodians can include banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) to act as the custodian of an IRA. Most IRA custodians limit holdings in IRAs to company-approved stocks, bonds, mutual funds and CDs. Banks, brokerage firms, mutual fund companies, and trust companies are generally the custodians of traditional and Roth IRAs.
Limit IRA assets to relatively less risky investments, such as mutual funds, exchange-traded funds, bonds, and publicly traded stocks. Pursuant to Section 408 of the Internal Revenue Code (IRC), an IRA can only be established and managed by a bank, financial institution, or trust company authorized in accordance with state law. An IRA trustee, also known as a custodian, is the institution that manages your retirement account. By law, each individual retirement account must have a custodian or trustee.
An IRA is a custodial account and requires a custodian to maintain their tax-advantaged status. The custodian ensures that all investments are approved by the Internal Revenue Service and also completes all required reports and documents for the tax authority. The custodian acts as the basic supervisor of the account and is also responsible for functions such as sending investment performance statements and buying and selling investments for the IRA. Because self-directed IRAs allow for a variety of investment options, they can offer greater diversification than standard IRAs.
In other words, to establish an individual retirement account, the IRA must be opened with an authorized bank, financial institution, or trust company, such as IRA Financial Trust. However, in the financial services industry, a self-directed IRA generally means an IRA in which the custodian allows you to invest outside of the more traditional world of stocks, bonds, mutual funds, and exchange-traded funds (ETFs). The self-directed IRA custodian or trust company will generally have a banking relationship with a bank that then holds the IRA funds in a special account or general account. In their role as a passive custodian, a directed IRA custodian does not solicit investments and does not provide advice or recommendations to clients regarding investments, acquired or held in IRAs.
A directed IRA custodian acts as a passive, non-discretionary custodian of customer-directed individual retirement accounts (“IRAs”), also known as customer-directed individual retirement accounts (“IRAs”), as defined in Section 408 of the Internal Revenue Code (IRS), in. In fact, almost all banks and financial institutions, which are custodians of IRAs, do not allow their clients to use IRA funds to make investments in alternative assets for the simple reason that they do not make money from those investments. As an IRA investor, you know that you can only establish an IRA with a bank, financial institution, or authorized trust company. A self-directed IRA is an IRA where you choose funding methods and instruments and allow you to expand investment options.
However, for IRA investors who want to make investments in alternative assets with their IRA, such as real estate, the custodian of the IRA is not considered a fiduciary because they do not provide investment advice. A custodian of a self-directed IRA earns his/her fees from the custody and administration of investments in alternative assets that the IRS approves and is owned by an IRA or other retirement plan. An IRA manager essentially acts as an intermediary between the owner of the IRA and the custodian of the partner. Self-directed IRAs allow you to invest in a broader and potentially riskier portfolio of assets than other types of IRAs.