What is a custodian or trustee and how to choose it for your IRA?

Opening an IRA account allows you to gradually stockpile up to $6,500 to $7,500 a year towards your retirement tax-free until you reach age 59 1/2. However, to qualify for deferred taxes on your IRA, the IRS requires a custodian to oversee your account.

But just what is a custodian, and how do you choose one for your IRA? Let’s take a look.

What is a Custodian for Your IRA?

A custodian for your IRA is simply an IRS-approved third-party institution, such as a bank or investment company, that serves as a trustee on your behalf to facilitate the purchase, sales, and care of the investment assets for your plan.

They also handle all tax reporting paperwork for the IRS and provide you with your own records to track your assets’ performance.

The type of IRA account you choose will dictate how much control you have over the investments in your account and, thus, the type of custodian you will choose.

Self-Directed IRA Custodian/Trustee

A self-directed IRA gives you the exciting opportunity to own physical assets, such as gold, silver, Bitcoin, real estate, and more, as part of your retirement plan.

The custodians of these types of IRAs allow you total control over the investment purchases you make for your retirement account. However, they do not actually sell the assets to you. Instead, once you find an alternative asset you would like to add to your portfolio, you simply let them know, and they will complete the transaction for you.

You Will Also Need to Choose a Depository

As per IRS rules, they will then send any moveable, tangible investments to your chosen fully-insured, maximum storage facility for safekeeping.

During this time, you can sell and trade your stored assets whenever you want. However, if you do so before reaching legal retirement age, the IRS will charge you an early withdrawal penalty.

Most depositories also allow you to visit your assets in person, or they may send you a photo as proof your assets are in storage for peace of mind.

A self-directed IRA custodian is not an investment advisor. Hence, they do not guide you on which assets may be suitable for your retirement account. But, this means, they also do not charge commissions for their service. However, there is a depository fee to store your moveable investments, usually based on the type or amount of your assets, and there is also a fee to manage your account.

Usually, the alternative asset investment company you work with will provide you with a list of custodians they have vetted and prefer to work with to help make it easier for you to choose a custodian. However, you may also choose one for yourself using your own research.

Traditional IRA Custodian/Trustee

On the other hand, if you are not much of a risk taker and simply prefer the traditional risks of investing in stocks, bonds, and other security market investments, your custodian will be the financial institution you choose to purchase your shares.

They differ from self-directed IRA custodians in that they do offer investment advice. However, they will charge commissions and other fees for their service. You will also be limited to purchasing the stock market equities they choose for your portfolio because it is not a self-directed IRA.

How to Choose A Custodian/Trustee For Your IRA

No matter which type of IRA you choose, it is important to practice due diligence to determine if the institution’s custodian is right for you.

One of the best ways to vet a custodian for yourself is to conduct an online search of them to ensure they are both legitimate and experienced.

Some sites to look for include:

The Better Business Bureau (BBB)

The Better Business Bureau is a trusted organization that many people use to determine if a company is ethical to work with.

Hence, it’s a good place to find customer feedback, BBB feedback, and other details on a custodian, including how long they have been in business, to help determine their trustworthiness.

.Gov Sites

Researching various .gov sites will allow you to learn if a custodian has any official lawsuits filed against them by the state for fraud and more to help keep you safe.

Customer Reviews Sites

Customer review sites are also good places to learn about customer experiences with a custodian. So be sure to research a few to find out more about a custodian before moving on.

Some reputable customer review sites include Business Consumer Alliance, Trustpilot, Trustlink, Google Reviews, and Yelp.

Contact Them One-On-One

You should also contact the custodian one-on-one to see how comfortable you feel working with them.

During this time, be sure to ask important questions, such as what specific services they offer, what are their account fees, and if they provide an online dashboard to track your investments.

If it is an alternative IRA custodian, you may also ask about their depository locations to determine if they work with one near you.

Once you gathered all the information you need on a custodian, only move forward if you feel satisfied with them to avoid losses later.