Choosing the Right Custodian for Your Self-Directed IRA

The ability to make your own investment choices from a broad range of investment types is why most people choose to establish a self-directed IRA. But investors should also extend this freedom to choose investments to selecting an administrator who meets their expectations of safety, credibility, competence, and customer service.



When choosing a custodian or administrator for your IRA, like choosing an investment, there’s some criteria to consider. First, here is some background information. An IRA custodian must be a bank, credit union, trust company, savings and loan, or an entity that is licensed and regulated by the IRS as a “non-bank custodian.” The assets are always held by a bank. Banks who offer self-directed IRAs often contract out the administration, record keeping, and other services to third parties, often known as third-party administrators, but the custodian of the IRA never relinquishes custodial control over the IRA and the assets in it. Banks often vest the assets of IRAs in a nominee name for the benefit of your IRA. Banks have hired third parties to provide such functions for decades, even for IRAs that are not self-directed. (The relationship between the IRA customer, custodian, and third-party administrator is described in IRS form 5305.)



Depository banks are always regulated and supervised by state and national regulatory bodies. Banks that hire outside administrators are required to ensure that the administrators adopt the policies and procedures approved by the custodian. The administrator must also perform its obligations to the custodian to the same or better standard as the custodial bank. The administrator is often required to have an independent third party verify all transactions. Cash transactions are often only permitted by the independent third party, providing a level of control and oversight not found in many banks.



When choosing an IRA custodian or administrator for your hard-earned dollars, here are some things to consider:



1. Make sure that you receive the custodial document, form 5305, from your administrator. Do not open an account without this document.



2. Read form 5305 to confirm that a relationship exists between the custodian and the nominee or administrator. You might want to call the custodian to determine that the custodian has a relationship with the administrator named.



3. Make sure that the undirected funds in your IRA are FDIC-insured. If the IRA has more than $250,000 in cash, find out if the custodian and administrator have programs for pass-through insurance from other banks to protect cash in excess of the bank limit. FDIC insurance is backed by the U.S. government. Brokerage firms use SIPC insurance, which is not backed by the U.S. government, so there might be risk associated with cash deposits at brokerage firms.



4. Visit your administrator or custodian. Make sure that they have a physical address. If the custodian operates in a different state from the one it is chartered in, make sure that the state regulatory authorities permit operations from a different state. A simple phone call to the regulators should suffice.



5. Find out how much insurance the administrator and custodian maintain for any eventuality involving your account and the limits of coverage, for example, for errors and omissions.



6. Determine how long the custodian or administrator has been in business involving self-directed IRAs. Although time is not always an indicator of quality, those who have been in business for a long time have done things properly because they have subjected to regulatory scrutiny.



7. Information provided by a self-directed IRA administrator in print or on a website must always assure you that they sell no product or, if they do, it must be fully disclosed in their materials. Stock brokers might offer self-directed IRAs and also sell securities or insurance products. If an custodian or administrator provides you with literature from an investment provider along with their IRA package, beware. True, impartial self-directed IRA custodians and administrators cannot provide products, such as LLCs, real estate, notes, or securities, in any form.



8. Determine if the custodian or administrator provides regular education through the Internet or its offices. The education must be education only and not for selling investments.



9. If there are offers that seem to permit you to use your IRA for purposes other than retirement or appear to be to good to be true, check them out and evaluate them using an independent legal or accounting advisor.



10. Establish service levels for your account. Do the people responsible for handling your account know the subject matter? Does the office handling your account understand local customs for transactions?



11. Is the reporting for your transactions in a form that is effective for you, such as online, in real time, paper-based, 24/7 access, and so on.



12. Are fees understandable and fully disclosed?



13. Watch out for providers that make efforts to disparage their competitors. In fact, many states have laws barring the entities that they regulate from espousing negative comments about another custodian or administrator. Rather than rely on the negative information, do your own independent analysis and due diligence.