An IRA custodian can make your financial journey harder or easier. That’s why it’s important to get the right custodian to help you grow your assets faster.
In this article:
- A Basic IRA Custodian Checklist: What Does a Custodian Need to Operate?
- What Is the Difference Between a Custodian and an Administrator?
- Choosing the Best Custodian for Your IRA: Experience, Knowledge, and Service
- How Does a Custodian Provide Value?
Your Custodian and Investment 101
Custodian Definition: A person or entity who holds clients’ securities for safekeeping to minimize the risk of loss or theft.
A Basic IRA Custodian Checklist: What Does a Custodian Need to Operate?
First off, only custodians can hold the portfolio of an IRA, according to IRS Publication 590. If a person decides to manage and record all movements of his or her portfolio, he or she does not receive the tax benefits as their assets are not considered as part of an IRA.
Only a bank, a credit union accredited federally, or an entity that received approval from the IRS can hold funds as a custodian. Before choosing an entity to hold your accounts, make sure that the person works for a licensed organization.
Another important thing to investigate is the insuring body of the custodian. Insurance not for the assets of the client, but of the assets of the custodian itself, helps to minimize bankruptcy risk.
Is the FDIC or the SIPC covering the said custodian? Better yet, does the IRA custodian have both entities as insurers?
After asset insurance comes the errors-and-omissions insurance (E&O). E&O protects the custodian by taking care of expenses if a client claims losses due to negligence or inadequate work from an agent of the custodian.
A good custodian will also advise how best to go about a self-directed IRA in your profile.
Ask who audits them and how often they get an audit every year. Interior and exterior audits are a must, especially for financial institutions. It is a good business practice to have at least an annual audit from a neutral third party.
How many principals, brokers, and agents does the company have? How many people are privy to your information and have access to your portfolio (the lesser, the better)?
You can check the leadership of the custodian. These records are public and show transparency, which is extremely important in an IRA custodian.
Lastly, ask for references, like clients that you may know. You can also ask if they have accreditation with the Better Business Bureau.
What Is the Difference Between a Custodian and an Administrator?
In a nutshell, a custodian holds and records all your IRA transactions. An administrator only markets, sells, and updates possible IRA transactions.
IRA custodians must have a federal license from the IRS. They also need to have relatively complex departments that perform needed operations like holding stock certificates and issuing funds.
On the other hand, administrators cannot hold investments by themselves. They partner with a custodian to do the record keeping for them while marketing assets and investments to their clients.
A lot of supposed self-directed IRA custodians are actually administrators. If a firm invites you to move your IRA with them, ask first if they are legal custodians or just administrators.
RELATED: Guide To A Diversified Portfolio
Choosing the Best Custodian for Your IRA: Experience, Knowledge, and Service
An easy way to find a reliable custodian is to check how long they have existed. A list of your choices for a self-directed IRA custodian can help, and a great way to start the list is to rank them by age.
Another important factor to consider is the size, which goes for both assets held and corporate network and branding. While large institutions are generally safe choices for IRA custodians, a smaller credit union may need some digging up to see if they qualify.
In the financial world, size does matter as size denotes safety of assets and mitigation of risk. The amount in the custodian’s balance sheets and the number of clients are particularly important, especially for a self-directed IRA custodian.
Age usually means more experience, and experience more than likely means expertise in the field. Also, older custodians often have more streamlined interfaces for their users, which could make the investment process easier.
However, do not discount IRA custodians that haven’t been around as long. They might have changed their name or branched away from a parent company.
Another important criterion lies with the people. Specifically, the quality and quantity of people in the firm.
Information and knowledge are perhaps the most critical resources for an investor. A good custodian should focus on these areas as well.
Does the company provide training and education for its investors? Do they have resource pages that tackle the more complex side of investing, like regulations as well as market news?
Information is important but the method of sharing it is critical as well. How does the custodian share information and expertise?
Are there videos on how to navigate the platform? Do they publish blog posts and articles about what terms the financial world uses?
Also, investors should not forget about the fees. The entity should give not only a transparent breakdown of expenses but also reasonable rates.
Custodians usually just give investors a lump sum fee without explaining what these fees are. Providing a schedule of fees can help investors greatly, as transaction fees are separate from management fees.
How Does a Custodian Provide Value?
An IRA custodian provides efficient support, clear records, and accurate trade executions.
Your IRA provides you not just an expectation of growth but also duties and responsibilities. There are records to keep, regulations to follow, and transactions to perform.
A custodian takes care of all the necessary operations other than deciding investment strategies. These operations include knowing which investments are not allowed in your IRA.
The taxpayer may not know that their trades may make the IRS suspicious of them, and having a custodian can help get the IRS off their back.
An important role that most investors ignore is that of a record keeper. In a transaction, both buyer and seller make a paper trail.
However, the seller and buyer are not the only entities that need to receive records. FINRA or the IRS requires documentation of the trades, as well as the broker.
A custodian consolidates all necessary paperwork and records and then forwards said records to the necessary parties.
Choosing your IRA custodian is an important process in your financial journey. In fact, you should start by making a list of choices and deciding which can provide you with the most value.
For the bare minimum, a custodian, whether it is a self-directed IRA or a traditional one, should have a license from the IRS as well as appropriate insurance. Only financial firms can hold IRA assets, as well as have an internal and external audit process.
Are you satisfied with your current IRA custodian? What other characteristics are you looking for in a financial entity? Let us discuss in the comments section below.
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