Many people find the role and duties of a self directed plan account custodian to be confusing and complex, especially since the financial media has done such a great job of unfairly criticizing them of late. There are many inaccurate facts and myths surrounding them, but the fact is, their job is quite straightforward.
As a retirement holder, it would be a monumental task to research, learn and understand all the IRS rules, laws, regulations, prohibited transactions, investment options and disqualified entities involved in a possible self-directed transaction. This is precisely where custodians come in. They can help explain all these subtleties to you and help you navigate your way through it all.
A self-directed retirement program is one of the best, but least well-known retirement plan structures in the market today, especially if flexibility is a priority for you. You can use your self-directed account to invest in real estate, bonds, precious metals, gold, oil, stocks or anything else you choose that is IRS compliant. Because there is such a diverse range of investments that an account holder can invest in, the custodian can help to inform individuals on what options are allowable to hold inside an account, but that is where the line is drawn.
Custodians are responsible for all the administration associated with your account. They are required to help you file all the relevant paperwork, issue statements and report tax information to the IRS. A custodian is often thought of as a person, but the fact is it can be a bank, savings and loan company or some other entity that offers financial services. Their primary role is to administer your qualified account and make sure it complies with all the IRS retirement account rules and regulations and to file reports to the IRS annually.
The custodian is the middleman and you are the point person when it comes to making investments. You both call the play and quarterback the transaction. The custodian merely runs the play you draw up.
Plan custodians make sure everything is peachy between you and the IRS and that no paperwork is left out of place. Think of them as your administrative assistant for your retirement account, if you will. Despite all the mythology being spouted on the web about what the responsibilities of a custodian are.
- They cannot make predictions about an investment’s profitability or success.
- They are not allowed to solicit you for an investment opportunity.
- They don’t provide investment advice.
- They don’t vet investments or investment promoters to determine what is a winning investment and which is a loser.
- They are not responsible to teach you how to handle your own investments.
First of all, with so many investment opportunities it would be impossible to do so at an affordable cost. The responsibility for researching an investment and those promoting is the sole responsibility of the account owner. No matter how knowledgeable a custodian is, they are only passive players or a pass-through service provider and only direct your personal plan funds at your specific direction.
Whether you feel like you need to have a custodian for your account is irrelevant, it is legally required. You are not allowed to administer your own account without one. You can only make the decisions. If you would like more control of your retirement account, then keep reading.
A self-directed retirement program custodian can require that you pay extra fees such as transaction fees for every transaction in addition to your annual fee. Fees between custodians can differ drastically from company to company and it depends on things like their level of service and how much admin they are performing on your behalf. You need to think of hiring a custodian like hiring a new employee. They are a vital element of your team and you need to make sure you get the best, but the most affordable cost.
A custodian needs to be accredited by the IRS and this process is very stringent to ensure that they meet all the standards required. The IRS needs custodians because, unlike mutual funds, self-directed IRAs are much more difficult to monitor. This makes custodians their eyes and ears.
While some feel that they are an unnecessary requirement, a good custodian might end up being the best addition to your team yet, so choose yours wisely.
The Benefits of Going Truly Self Directed
One little thing you ought to know is: if you have a Individual Retirement arrangement, then it is required to have a custodian, however, if you are truly self-directed, then you can complete transactions on your own without any custodial interference. This is beneficial for many qualified plan holders who go the self directed route since it completely eliminates any confusion as to who is in charge or responsible for the account and you get checkbook control to boot. If you are truly self directed, then you have control of the checkbook, you have checkbook writing privileges and don’t have to go to the custodian to ask for permission to purchase any IRS compliant assets.
With a truly self directed account, the custodian is still required to report to the FEDs what assets you own and the approximate worth of the account. However, if you opt-in for a truly self directed individual retirement plan, then there is just a flat – annual fee annually. This can improve your ROI, simply because you are allowed to keep more of the money that is earned inside the plan over the lifetime of the account versus shelling out that money in fees. Make sure to consider these added savings when you are considering what route to take with your retirement.