A financial institution, such as a bank or a brokerage, is typically entrusted with the responsibility of safeguarding the assets of a client’s Individual Retirement Account (IRA) (IRA). The Internal Revenue Service (IRS) requires that an IRA custodian be an approved financial institution; an individual cannot act as an IRA custodian. Non-financial institutions that want to serve as IRA custodians must first obtain IRS approval.
The IRA custodian executes transactions on behalf of the client, maintains all necessary and appropriate records of all actions taken in the custodial capacity, and files any reports required by the custodial agreement or the law, such as statements and tax notices. It could also be in charge of distributing the IRA’s assets according to the client’s wishes and filing the necessary paperwork. However, because an IRA custodian is not required to provide investment or legal advice, it is the client’s responsibility to ensure that all instructions given to the custodian are in compliance with the IRS code.
An individual retirement account’s assets can be invested in a wide range of securities and other financial instruments. The investment of IRA assets in collectibles such as art and rare coins, as well as life insurance, is prohibited by regulations, but many other investments, such as real estate, franchises, mortgages, and tax liens, are permitted. Many financial institutions, on the other hand, will restrict the types of investments that IRAs in their custody are allowed to make. Owners of IRAs who want to invest their funds in real estate or other non-traditional investments must find and choose an IRA custodian who will allow them to do so. As a result, it would make sense for a real estate management firm to apply for IRS certification as an IRA custodian in order to manage real estate-invested IRAs.
In many cases, clients simply deposit assets into a custodian’s account with general instructions on how to handle or invest them. IRA custodians have a fiduciary responsibility under the law, which means they must prioritize the interests of their clients over their own. That means, for example, the custodian may not invest the IRA’s assets in high-risk projects or investments without the client’s express permission.
A self-directed IRA is another option for consumers. This is an IRA in which the client directs the activities and investments, with the custodian simply carrying out the client’s wishes.
One of the most important aspects of self-directed IRAs to remember is that neither the IRA owner nor the custodian can profit directly from the investments, though the custodian may charge for services rendered. As a result, while the IRA may invest in real estate, the owner cannot profit from the investment immediately by occupying or managing the property. Similarly, if the IRA bought the owner’s mortgage or tax lien, it would be a conflict of interest.
When choosing an IRA custodian, keep in mind not only the types of investments it will allow in clients’ IRAs, but also the fees it will charge. Traditional, non-self-directed IRAs will typically have a small annual maintenance fee. Due to the non-traditional nature of the assets, self-directed IRAs may be significantly more expensive to administer.
IRA custodians are important to IRA owners, but their role is limited and, in some cases, limiting. Owners of Individual Retirement Accounts (IRAs) should become thoroughly acquainted with the rules governing their IRA to ensure that they are not unduly restricted in achieving their retirement savings goals.