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Who can become a Self-Directed IRA Trustee?

IRA-Trustee
3 Minute Read

An individual retirement account is defined under Internal Revenue Code Section 408 as a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries. The trustee of the IRA is the bank or IRA custodian that is responsible for the IRA administration and, in most cases, the custodian of the IRA assets. 

What is an IRA Trustee?

An IRA trustee, also called a custodian, is the institution that administers your IRA. By law, every qualified retirement plan must have a custodian or trustee. A trustee may be a bank, credit union, financial institution, or trust company, such as IRA Financial Trust. IRS regulations require that either a qualified trustee or custodian hold the IRA assets on behalf of the IRA owner. A Self-Directed IRA custodian, also called a passive custodian, allows IRA holders to engage in non-traditional investments (i.e. real estate), but generally does not offer investment advice or serve as a fiduciary.

In sum, pursuant to Internal Revenue Code Section 408, an IRA can be established and administered by a bank, financial institution, or authorized trust company. An IRA trustee, also called a custodian, is the institution that administers your IRA. By law, every IRA must have a custodian or trustee.

IRA Custodians

The IRA custodian has the right to decide what types of IRS approved investments it will allow its IRA clients to invest in. Almost all banks and financial institutions that offer IRAs only permit their IRA clients to invest in traditional assets, such as equities, mutual funds, and exchange traded funds. On the other hand, a Self-Directed IRA custodian, also called a passive custodian, allows IRA holders to engage in non-traditional investments (i.e. real estate) and does not offer investment advice.  Hence, unlike financial institutions which earn fees and commissions from facilitating traditional investments, a Self-Directed IRA custodian does not sell investments or provide investment advice. A Self-Directed IRA custodian earns fees for providing IRA administration and custody services for IRS approved alternative assets

The IRA custodian is essentially responsible for maintaining and administering the IRA. To this end, the IRA custodian is tasked with the responsibility of complying with all IRS reporting requirements with respect to the IRA, such as the filing of IRS Forms 5498 and 1099-R. 

The Self-Directed IRA custodian is not a fiduciary and does not offer any investment advice.  Its sole role is to facilitate non-prohibited transactions based on the exclusive direction of the IRA holder.  Making the investment(s) on the IRA owners behalf.  In addition, a self-directed IRA custodian is not permitted to offer legal or tax advice.

Opening a Self-Directed IRA Account with an IRA Trustee

The first step to establishing a Self-Directed IRA is opening an account with a Self-Directed IRA custodian, such as IRA Financial.  The account opening process can be done in minutes and generally involves completing an online application.  The online application will request personal information of the IRA holder as well as information pertaining to the type of IRA ones wishes to establish.  In addition, the IRA holder will be asked to provide a copy of a license as well as an account statement displaying the rollover information.

The second step to establishing a Self-Directed IRA account is funding the account.  In general, there are two ways to fund a Self-Directed IRA. The first is via an IRA contribution. The maximum IRA contribution for 2022 is $6000 or $700 if over the age of 50. The second way to fund in an IRA is via a rollover.  Rollovers can be direct and indirect and are generally tax-free.

The third and final step to establishing a Self-Directed IRA is making the Self-Directed IRA investment.  This is where the client directs the IRA trustee (the IRA custodian) to make the IRA investment.  The IRA custodian is not responsible for advising on the investment nor is it permitted to provide any investment advice or investment recommendation. The Self-Directed IRA custodian has no fiduciary responsibility to the IRA owner and is simply the party responsible for facilitating the Self-Directed IRA investment.  It is for this reason that every Self-Directed IRA investor should perform adequate due diligence on all Self-Directed IRA investments as they are solely responsible for its outcome. Accordingly, working with a financial or tax advisor that can help you review the financial terms and risks inherent in the Self-Directed IRA investment is important.    

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[10:44 PM] Valerie Marszalek-Boik