ROLE OF SELF-DIRECTED IRA (SDIRA) CUSTODIAN
What is an IRA Custodian?
An IRA custodian must meet IRS requirements and is subject to regulatory oversight and audits. By adhering to these IRS standards, a custodian is authorized to hold title to assets, investments, or other property, disburse funds, manage clients' funds, and establish various client accounts.
Who Can Hold Your SDIRA?
According to the Retirement Industry Trust Association:
The IRS has jurisdiction over IRAs and the Internal Revenue Code that defines and governs IRAs, including determining which institutions are eligible to maintain custody of them. Essentially, any bank, credit union or state chartered financial institution (e.g., trust company) is automatically qualified to have custody of IRAs based on their approval and acceptance by a regulating body such as a state banking commissioner or the FDIC. Any institution that is not in that class, must apply and be approved by the IRS in order to be a custodian of IRAs. There are currently about 270 such institutions, called "non-bank custodians", so approved in the U.S. today (e.g., broker/dealers, mutual funds companies, etc.). If your company is neither in the "banking" group, nor approved by the IRS, then it may not offer IRA custodial services directly. If you place your IRA with an institution that is not authorized as described above, you face the risk that your IRA will be invalidated and that you will be subject to taxes and penalties. So, a word to the wise, please be sure to determine that the institution with which you place your IRA is duly chartered in one of the two alternative classes described above. If it won't supply you evidence of its status upon request, keep moving.
A self-directed IRA custodian serves as a passive, non-discretionary custodian of customer-directed, also known as self-directed, individual retirement accounts (“IRAs”), as IRA is defined in Section 408 of the Internal Revenue Code as amended. In its role as a passive custodian, a self-directed IRA custodian solicits no investments and provides no advice or recommendations to customers with regard to investments, acquired by or held in the IRAs. A self-directed IRA custodian has no authority to take any action with regard to the investments acquired by or held in the IRAs without the express direction of the IRA owner.
A self-directed IRA custodian occupies a unique position in the financial services industry. It is not a broker or an investment advisor. It does not sell investments, determine suitability, or provide due diligence on investments for the IRA owner. What the self-directed IRA custodian does is execute investment directions from the IRA owner and perform the many custodial and administrative duties that are necessary to preserve the tax-deferred status of an IRA and otherwise administer the account and custody the assets.
WHAT A SELF-DIRECTED CUSTODIAN DOES:
- Maintains IRA agreement and forms subject to the Rules and Regulations of the Internal Revenue Service and the U.S. Department of Labor.
- Processes applications to establish IRAs.
- Implements and follows an Anti-Money Laundering (“AML”) program, as well as policies and procedures to comply with the Bank Secrecy Act (“BSA”), the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“US PATRIOT Act”), Financial Crimes Enforcement Network (“FinCEN”) guidelines, the office of Foreign Asset Control (“OFAC”) regulations, and Anti-Terrorist Financing (“ATF”) laws and regulations.
- Accepts, documents, and records contributions, transfers, and rollovers from other IRAs/retirement plans.
- Implements technology and procedures to protect the privacy of account owner and account data.
- Executes account owners’ investment instructions as directed by sending funds from the IRA to the client-selected investments.
- Gathers, executes, and holds documents such as subscription agreements, operating agreements, offering memorandum, promissory notes, certificates, and other evidences of ownership of investments by the IRA.
- Receives and records income from the assets held in the IRA.
- Executes account owners’ instructions to sell, withdraw from, or liquidate investments held in the IRA.
- Coordinates with investment sponsors the purchase and sale/liquidation of investments as directed by account owner.
- Facilitates, as directed by the account owner, distributions from the IRA to the account owner or transfers to other IRAs or retirement plans.
- Performs tax reporting of IRS Forms 1099-R and 5498 as required by the IRS.
- Provides IRA statements to the account owner which includes transactions and cash and assets held in the account.
- Complies with all applicable State and/or Federal Regulations governing IRA Custodians.
WHAT A SELF-DIRECTED CUSTODIAN DOESN'T DO:
- Act as an investment advisor, tax advisor, or legal advisor.
- Provide investment, tax, or legal advice.
- Recommend or endorse investments (agreeing to custody an investment is not an endorsement or approval of the investment).
- Recommend or endorse investment advisors (working with an investment advisor selected by the account owner is not an endorsement or approval of the investment advisor).
- Determine the fair market value of account investments (reporting of the valuation submitted to the Custodian by the investment sponsor does not constitute a representation by the Custodian that the reported value is accurate).
- Perform due diligence for the account owner on any investment or investment sponsor.
- Determine the suitability of any investment for the IRA or the account owner.
- Determine whether a transaction would be deemed a Prohibited Transaction as outlined in Internal Revenue Code section 4975 (26 USC § 4975).
DOES A SELF-DIRECTED IRA CUSTODIAN APPROVE AN ACCOUNT OWNER’S INVESTMENT DECISIONS OR EVALUATE RISK?
No. Self-Directed IRA Custodians do not endorse or approve an account owner’s investment decisions or evaluate an account owner’s investment risk. It is not the responsibility of a Directed Custodian to:
- Provide investment analysis or recommendations
- Determine investment suitability or investment risk
- Perform due diligence concerning an account holder's investment decisions.
Account owners are strongly encouraged to make use of legal, tax and financial advisors to support these efforts.
WHAT IS MY ROLE AS AN ACCOUNT OWNER?
The account owner is responsible for:
- Finding and selecting a Custodian for your IRA or retirement plan.
- Selecting, managing, retaining, and disposing of any investment held in your account or plan, based on your risk tolerance and individual financial situation.
- Seeking appropriate tax or legal counsel to determine whether a proposed transaction would be deemed a Prohibited Transaction as outlined in Internal Revenue Code section 4975 (26 USC § 4975),
- Engaging in proper due diligence for those investments and the principals involved, taking into account market fluctuations and economic conditions among other factors.
- Monitoring your account and the investments made within that account on an ongoing basis, including the investment performance.
- Notifying your Custodian regarding any unusual or unexplained investment activity or if any delays are experienced in receiving payments or information promised by the investment sponsor/issuer.
- Understanding that certain investments in operating companies and debt-financed real estate may generate Unrelated Business Taxable Income or Unrelated Debt Financed Income and the account owner should consult with their tax professional to determine if any tax is due, and if so prepare the Form 990-T and instruct the Custodian to pay the tax from the IRA.
HOW DO I KNOW IF MY INVESTMENT ADVISOR/BROKER/SALESPERSON IS REGISTERED?
Ask the advisor/broker/salesperson how they are registered for regulatory purposes and verify their disciplinary history by using the regulatory websites and link(s) shown below:
- FINRA BrokerCheck
- SEC Investment Adviser (IAPD) Search
- National Futures Association (NFA) BASIC Search
- Contact the appropriate state securities regulators.
Also, be aware of possible conflicts of interest with advice you may receive since advisors, brokers, and salespeople often get paid a commission on your investment.
DOES A SDIRA CUSTODIAN PROVIDE VALUATIONS FOR MY INVESTMENTS WHICH ARE NOT PUBLICLY TRADED
No. A Directed Custodian only reports (and does not determine) the valuations it receives from the investment sponsor/issuer (or the investment’s agents) or an independent valuation submitted by the account owner, and does not guarantee the accuracy of any valuation it reports. As such, the account owner should not rely on valuations reported or delays in reporting valuations in making investment decisions. The account owner should obtain valuation and other information directly from the investment sponsor or other sources in making their investment decisions.
WHERE CAN I LEARN MORE ABOUT THE RULES THAT GOVERN MY IRA OR RETIREMENT PLAN?
General information on the IRS rules regarding IRAs can be found in IRS Publication 590-A and 590-B, and for business retirement plans in IRS Publication 560. For more in-depth information on Prohibited Transactions, you may wish to read IRC 4975. Because important financial and tax decisions are involved, account owners are strongly encouraged to seek help from legal, tax, and financial advisors to support these efforts.
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Disclaimer: The information provided herein is for educational and informational purposes and shall not be construed as financial advice.
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