An IRA custodian is a financial institution that is authorized by the IRS to provide custodial services and store assets on behalf of IRA owners.. According to IRS rules, an IRA must have a custodian bank, which can be a bank, a mutual fund company, or a brokerage firm. The IRS requires that your IRA has a custodian bank.. It is the responsibility of the custodian bank to execute the investment decisions made by the IRA owner and to ensure that all investment inquiries and account activities are carried out in accordance with regulatory requirements set by the IRA..
Technically speaking, any IRA where you make all investment decisions is “self-directed.”. In the financial services industry, however, a self-directed IRA usually means an IRA in which the custodian allows you to invest outside the more traditional world of stocks, bonds, mutual funds, and exchange-traded funds (ETFs).. Unless you’re familiar with a robo-advisor, the availability of knowledgeable specialists to answer your questions online or over the phone is very important.. Nothing is more frustrating (especially if you’re managing a self-directed IRA) than getting incomplete or confusing answers to your questions.
When opening an IRA, it’s important to ask yourself a few questions before choosing a custodian. Do you prefer a traditional account or a Roth account? Or both? Do you enjoy investing in CDs, mutual funds, stocks, and bonds, or are you longing for the more adventurous options that a self-directed IRA offers?. An individual retirement account (IRA) offers investors certain retirement savings tax benefits. Common examples of IRAs include the traditional IRA, the Roth IRA, the Simplified Employee Pension (SEP) IRA, and the Savings Incentive Match Plan for Employees (SIMPLE) IRA.
All IRA accounts are managed by custodian banks for investors. Custodian managers may include banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) as an IRA custodian. Most IRA custodian banks limit IRA account holdings to company-approved stocks, bonds, mutual funds, and CDs. Since alternative investments are more difficult for custodian managers to store, administrators and facilitators have emerged as a link between the IRA account holder and the custodian bank..
Roth IRAs are retirement accounts where the owner pays tax on the money deposited into the account (contributions after tax) and then all withdrawals are tax-free. One important area when considering mutual funds is looking for a custodian that offers a wide variety of mutual funds with no encumbrance. It’s important to note that some states don’t allow administrators to manage IRA accounts in this way on behalf of the custodian bank.. Banks are an option if account holders prefer to have FDIC-insured securities such as certificates of deposit (CD) or money market mutual funds in the IRA..
However, if you’re fascinated by one of the unconventional investments available to self-directed IRAs, you need to be particularly careful when choosing a custodian manager.. From the first contact, your interaction with a self-directed IRA provider should be friendly, professional, competent, efficient, and consistent. In general, the option to hold private investments with most custodian managers is only available to special wealthy clients.. The growing popularity of self-directed IRAs has increased the number of custodian banks, administrators, and funders that offer self-directed investment options..
That means looking for a custodian bank that is familiar with the consolidation rules and understands which types of IRAs cannot be combined.. In general, however, banks don’t get particularly high marks for IRAs, as most don’t offer many investment options outside of the instruments mentioned above.. The facilitators put themselves at the forefront of the process for an IRA owner’s new account and help them become familiar with the rules and implementation.. The fundamental difference is that a traditional IRA reduces your taxable income the year you earn it and defers any tax payments until you start withdrawing funds years later..