The Role of the Self Directed IRA Custodian
The first thing to know is that a Custodian is a necessity. Federal law requires all IRA accounts, standard and self directed, to be held by a Custodian. Even when you open a retirement account at a brokerage (or similar institution), somewhere in the process and paperwork is a Custodial agreement. The job of the mandated Custodian involves such duties as titling assets, issuing statements, and adhering to reporting requirements. Typically the Custodian will not offer investment advice, and instead exists just to fulfill administrative and mandated duties.
In a self directed IRA, the Custodian sometimes plays a more major role. This will be determined by the kind of self directed IRA you are using, Custodian-based or Checkbook Control. In the Custodian model, the Custodian acts as the tool which you use to actually place the investment. For instance, if you want to buy a rental property with your self directed Custodian IRA, you would fill out the Investment Authorization form, and then the Custodian would make the purchase for your IRA. In the Checkbook Control model, you don’t need the Custodian to make the purchase for you; instead you would purchase the property directly just by writing a check. In fact, in the Checkbook Model the Custodian plays a mandatory legal role but has little (if any) real interaction with the account itself.
Each of these self directed IRA models, and the role that the Custodian plays in them, come with its own advantages. The Custodian model offers a more economical set-up and is appropriate for those kinds of investments that require little investor maintenance. If you’re investing in a deal or company, but will not be handling any of the management, then a Custodian model is your better bet. If you’re investing in a property that you will be managing personally, then it’s probably worth it to upgrade to the convenience and economy of Checkbook Control.
If you choose to manage your self directed IRA with the Custodian model, then the choice of Custodian becomes very important. Since all of your documentation, asset management, and financial dealings will be going through the Custodian, it’s imperative that you find one that is professional and responsible. Excessive fees, slow response time, and general office mismanagement can turn even the best of accounts into a retirement nightmare. The best way to find a good Custodian for your IRA is via research and personal recommendations. Chances are you already know people who have gone through this process and they can share with you their positive or negative experiences. Take the time to research the company you want to use, and you’ll find that it will be time well spent.