Can I Be My Own IRA Custodian?
If you want to diversify your IRA with nontraditional investments like real estate, private placements, startup companies and promissory notes, a custodian will likely be necessary. Unfortunately, many fraudulent custodians misrepresent their responsibilities so as to sell you fraudulent investments.
Finding an experienced Self-Directed IRA custodian will assist in managing these challenges effectively. They have the necessary knowhow and are knowledgeable enough to safely oversee alternative assets that you hold within an IRA.
IRS Approval
Individual Retirement Account (IRA) custodians must be approved by the Internal Revenue Service, so before selecting an institution as your self-directed IRA custodian, do your due diligence on them thoroughly.
On the IRS website you will find a comprehensive list of IRA custodians. For best results they recommend working only with banks, credit unions or state chartered trust companies qualified to store retirement assets safely – for instance Equity Trust is registered with South Dakota Division of Banking as a trusted company and meets all criteria necessary for being an IRA custodian.
Trustworthy custodians should operate without conflicts of interest or make profits from recommending investments for your IRA or selling off any of its assets; rather they act solely as recordkeepers and administrators to report its value to the IRS.
Fees
If you want to invest in alternative assets like real estate or private placement securities, finding an asset custodian that allows self-directed investments will be necessary. A great place to begin searching is by consulting the IRS list of approved nonbank custodians. Once you’ve identified several candidates, check their credentials with either SEC/FINRA licensing and track record; alternatively speak to licensed investment professionals or lawyers for more details.
Some custodians charge flat fees while others levy transaction and service fees based on the value of your assets or number of transactions, so these should all be included when creating your budget. Loan costs or any fees related to purchasing annuities and collectibles should also be factored into this. It is always wise to verify pricing in your account statement for investments which can be difficult to value, such as those held illiquid investments such as annuities.
Taxes
Custodians are organizations approved by the IRS to hold assets in individual retirement accounts (IRAs). They give investors access to different investment vehicles ranging from traditional investments and self-directed IRAs that enable account holders to select their own investments.
Many IRA custodians restrict their clients to relatively low-risk investments such as stocks, bonds and mutual funds. But investors who wish to invest in alternative assets such as real estate, private equity investments, startups or promissory notes need an IRA custodian who specializes in these types of transactions.
These non-bank trust companies, often chartered by individual states, possess the expertise needed to handle more complicated investments while remaining compliant with IRS regulations – this may involve avoiding prohibited transactions, keeping records of all transactions, and disqualifying parties such as parents and children from account management duties. Furthermore, you can deduct their management fees from taxes in contrast with traditional IRA custodians which may only allow deductions up to 2%-of-AGI floor for miscellaneous itemized deductions or be subject to alternative minimum tax liabilities.
Security
As soon as you choose a self-directed IRA custodian, additional responsibilities arise due to their more risky investment options than traditional brokers. You must conduct due diligence on each investment you are considering as well as understand their tax ramifications; you must also avoid fraudulent investments purporting to come from legitimate custodians – scammers may use misleading language that gives the impression they will investigate and approve whatever investment it may be that interests you.
Top qualities of an ideal IRA custodian include offering an extensive selection of investment options at reasonable fees and providing superior customer service. Investors looking to diversify their retirement accounts with alternative assets should choose an IRA custodian who supports investing in riskier “alternative assets,” such as real estate, promissory notes, cryptocurrency investments and tax lien certificates as well as oil, gas and solar projects – this also usually results in higher level services since more documentation must be processed than is done with brokerage firms.
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