Do I need a Custodian for a Self Directed IRA?

Yes, a Self Directed IRA custodian enables you to invest your retirement funds into alternative assets such as real estate, private placements, promissory notes, etc. These assets are generally not available to you with a Standard IRA.  

The IRS requires all IRA funds to be held by a qualified third party such as a bank, trust company, or other authorized custodian. Individuals seeking to diversify their retirement portfolios retain the services of a Self Directed IRA custodian to perform the administrative duties to protect the tax-advantaged status of their investment. 

As “passive” custodians, Self Directed IRA custodians do not provide any investment, tax, or legal advice. Passive custodians act upon the instructions of investors after the investor has performed their own due diligence.   

The responsibilities of a Self Directed IRA custodian include:

  • Maintaining IRA agreements and forms subject to the regulations of the IRS and the U.S. Department of Labor  
  • Accepting, documenting, and recording contributions, transfers, and rollovers from other IRAs/retirement plans  
  • Executing accountholders’ investment instructions by sending funds from the IRA to the client’s selected investments   
  • Gathering, executing, and holding documents such as subscription agreements, operating agreements, offering documents, promissory notes, certificates, and other evidence of investment ownership by the IRA 
  • Receiving and recording income from the assets held in the IRA 
  • Executing accountholders’ instructions to sell, withdraw from, or liquidate investments held in the IRA 
  • Coordinating with investment sponsors the purchase and sale/liquidation of investments as directed by accountholders 
  • Facilitating, as directed by the accountholder, distributions from the IRA to the accountholder or transfers to other IRAs or retirement plans  
  • Performing tax reporting of IRS Forms 1099-R and 5498  
  • Providing IRA statements to the accountholder which includes transactions, cash, and assets held in the account  
  • Complying with all applicable state and/or federal regulations governing IRA custodians 

Trust companies like Madison Trust are authorized to provide a wide range of custodial duties. Madison Trust focuses on Self Directed IRAs exclusively. Madison Trust has invested all of its resources into creating a seamless experience for the self directed investor by providing clients with impeccable customer service and flawless transaction execution.  

Who is the Best Self Directed IRA Custodian?

To select the best Self Directed IRA custodian, conduct research and compare what each custodian has to offer. Here are a few steps regarding how to choose the best Self Directed IRA custodian to service your IRA:  

1. Research Customer Service Level

Compare Reviews – Online reviews are a good indicator of a custodian’s performance, as the best way to hear about a company’s service is directly from their clients.  Visit Madison Trust’s reviews page.

Identify Trained Professionals – All questions should be answered with accuracy and proficiency. A good indicator of a knowledgeable custodian is if they have CISP-trained professionals (Certified IRA Services Professionals) on staff. CISP certification is the highest-level training available for IRA Account Specialists.   

Ensure a Quick and Accurate Response – Nothing is more frustrating than waiting on an endless call queue to receive speak with a company representative. A quick response time and professional service is a must when working with important, time-bound investments.  

2. Determine if the custodian supports your investment choice

Before selecting a custodian, determine if the custodian supports your investment choice. The IRS allows IRAs to invest in all asset classes other than life insurance and collectibles. However, a custodian may choose to offer only certain investments. If you want to hold assets such as an IRA LLC, foreign investment, cannabis, or cryptocurrency, be sure the custodian supports your investment choice.   

3. review pricing model

Pricing for a Self-Directed IRA varies by provider. A Self Directed IRA custodian may charge fees to open the account, maintain the account, make investments, and close the account. In addition, a custodian will likely use one of two types of pricing models:  

  • Asset-based Fee – This fee is based on the total value of assets held within your Self Directed IRA. The amount charged increases as your account value increases.
  • Flat Fee – This fee is consistent regardless of the value of the assets in your account. For example, two separate Self Directed IRAs valued at $1,000 and $50,000 respectively, are charged the same flat custodian fee.

A Self Directed IRA custodian should be transparent about pricing and have no hidden fees.  Use the Self Directed IRA comparison calculator to determine the annual cost of a Self-Directed by various Self-Directed IRA Custodians. You can input your IRA Account Value and anticipated investment type to generate a personalized quote.

Self Directed IRA Custodian: FAQ

1. Can a Self Directed IRA custodian recommend an investment or evaluate the accountholder’s investment risk?

No. A Self Directed IRA custodian cannot promote an investment or determine the account owner’s investment risk. As passive custodians, Self Directed IRA custodians only act upon the instructions of the investor. Accountholders are responsible to conduct their own due diligence and are encouraged to speak to a financial advisor. 

2. What is my role as a Self Directed IRA accountholder? 

As an accountholder, you are responsible for:  

  • Finding and selecting a custodian for your IRA or retirement plan  
  • Selecting and managing your investments  
  • Seeking appropriate legal counsel or financial advisor to determine if a transaction is deemed a Prohibited Transaction  
  • Engaging in proper due diligence  
  • Consulting a tax professional to determine if any taxes are due. Certain investments in operating companies and debt-financed real estate may generate Unrelated Business Income Tax or Unrelated Debt Financed Income tax.  

3. Where can I learn about the rules that govern my IRA?

General information can be found at Self Directed IRA Rules and in IRS Publication 590.  

Selecting the best Self Directed IRA custodian can seem daunting, but it doesn’t have to be.  

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