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Self-Directed IRA Custodian Defined

Self-Directed IRA custodian by IRA Financial Group

What is a Self-Directed IRA Custodian? 

After the 2008 financial crisis, more investors turned to self-directed IRA custodians to make alternative asset investments. Self-Directed IRA custodians are becoming a popular provider to legally handle investments.

In this article, we explain why it’s important to use a Self-Directed IRA custodian over a traditional investment company. We also highlight the advantages of using a Self-Directed IRA LLC for your investments. 

IRA Custodians are a Requirement for Self-Directed IRAs 

The IRS regulations state that all IRAs (individual retirement accounts) must be held by a custodial entity, such as a bank or trust company.

Therefore, if you have an IRA (individual retirement account), you must have a custodian. Pursuant to section 408 of the Internal Revenue Code, a bank (Wells Fargo), financial institution (Vanguard) or authorized trust company (IRA Financial Trust) must establish and administer your IRA.

However, not all IRA custodians allow the IRA to invest in alternative assets, such as real estate. It’s not in the financial interests of traditional institutional investment companies, like Bank of America or Wells Fargo, to encourage you to make alternative asset investments. They don’t make money that way.

They do, however, make money when you invest in their financial products (traditional investments). But what happens if you prefer not to be limited to traditional investments?

Choose a Self-Directed IRA Custodian 

The majority of Self-Directed IRA custodians are non-bank trust companies. The Self-Directed IRA custodian or trust company often has a banking relationship with a bank that holds the IRA funds in a special account. This account is known as an “omnibus account.”

The omnibus account offers Self-Directed IRA clients with FDIC protection of IRA funds up to $250,000 in the account.

For example, IRA Financial Trust is a non-banking IRA custodian. IRA Financial Trust partners with Northern Trust, a private bank, to offer a safe and secure way to make Self-Directed IRA investments. With IRA Financial trust (a self-directed IRA custodian), you can make both traditional and non-traditional investments. 

Questions to Ask Your Self-Directed IRA Custodian 

You must thoroughly research which custodian you choose. Make sure they’re able to answer common questions regarding the self-directed IRA. Some good questions to ask your custodian include: 

  • What is a self-directed IRA? 
  • Are all self-directed IRAs the same? 
  • How does it work? 
  • What’s the difference between a Self-directed IRA vs Checkbook Control IRA? 
  • Why do I need an IRA custodian? 
  • What can I buy with a Self-Directed IRA? 

There are many questions you can ask. Of course, you should also ask questions specific to your investment transaction, such as: “I purchased a property – can I rent it out to a family member?” 

Primary Roles and Responsibilities of a Self-Directed IRA custodian

  • Holds and custodies IRA and 401(k) plan assets
  • Subject to state regulation by the state division of banking
  • Performance of administrative recordkeeping regarding the Self-Directed IRA
  • Performs administrative reviews of the Self-Directed IRA assets
  • Assists in opening & funding your IRA account
  • Makes the investment(s) on your behalf
  • Distributes and pays expenses per your request
  • Provides you with quarterly statements
  • Answers questions about your account and their procedures
  • Reports information required by the IRS and other governmental agencies
    • IRS Form 1099R – Distributions from your IRA
    • IRS Form 5498 – Contributions to and Fair Market Value of your IRA

IRA Administrators 

An IRA custodian is the preferable choice in comparison to an IRA administrator.

IRA administrators are not subject to any IRS or state audit or reviews. Therefore, they are not subject to ongoing oversight, especially in the area of prohibited transactions, which is important in order to keep your Self-Directed IRA in full IRS compliance.

Whereas, an IRA custodian is subject to quarterly state banking division audits and reviews, as well as IRS audits. As a result, this keeps your IRA safe from prohibited transactions and fraud.

Self-Directed IRA LLC with IRA Financial Group 

With IRA Financial Group’s Self-Directed IRA LLC, you have control to make any approved investment without an IRA custodian. Since all your IRA funds are in a local bank in the name of the Self-Directed IRA LLC, you only need to write a check straight from the IRA LLC account or wire the funds from the IRA LLC bank account to make an investment. 

The IRA Financial Group will take care of the entire setup of your Self-Directed IRA LLC structure. We can handle the process by phone, email, fax or mail. It typically takes between 7-21 business days to complete. However, this timing is largely dependent on the state of the LLC formation and the custodian currently holding your retirement funds.

Our tax and ERISA professionals are on-site to reduce setup time and cost. More importantly, each client of the IRA Financial Group receives a retirement tax professional to help with the establishment of the Self-Directed IRA LLC structure. 

Get in Touch

Do you have a question regarding Self-Directed IRA custodians or the Self-Directed IRA LLC that we didn’t cover in the article? Contact IRA Financial Group at 800-472-0646. Or fill out the form to speak with an IRA specialist. 

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