The Importance of Custodian Choice for Self-Directed Accounts

The self-directed IRA and 401(k) retirement accounts place extra duties on the custodial firm, extensive duties in the case of assets like rental property that require management. Choosing a custodian is quite important, as that firm or person has just about every duty in managing your assets other than buy and sell decisions.

The IRS regulations often use the terms “trustee” and “custodian” interchangeably, and they must be approved to handle the assets of retirement accountsi. From Section 1.408-2, Individual Retirement Accounts: “Trustee. (i) The trustee must be a bank (as defined in section 408(n) and the regulations thereunder) or another person who demonstrates, in the manner described in paragraph (e) of this section, to the satisfaction of the Commissioner, that the manner in which the trust will be administered will be consistent with the requirements of section 408 and this section.”

Being approved and being efficient, careful, and successful are not necessarily present in every approved custodian, bank, or firm. Perhaps the primary consideration could depend on your choice of assets. It is one thing for a custodian to let you make buy and sell decisions for precious metals or collectibles to hold, but another to handle the many tasks involved in rental real estate assets.

There are other considerations and questions involved in checking out custodial firms or individuals, includingii:

  • Regulators – which government entities regulate the custodian; federal, state, or both, and which is primary?
  • Expertise – where is their experience as far as assets? What have they managed in the past, and are they experienced in handling your chosen assets?
  • Help – though you are responsible for investment decisions, does the custodian have any materials or offer any help as regards your chosen asset types?
  • Clear Instructions – to stay on the right side of regulations and maintain tax-advantaged status, examine their provided instructions in what you can and cannot do, what they do, and what they do not do.
  • Compare Performance/Promises – this is more about being careful than trying to compare results. The IRS advises investors to be careful of promises of high returns, as fraud can be a riskiii.
  • Fees – depending on your asset choices, this can be simple or complex. While precious metals or collectibles for holding is relatively simple fee-wise, rental real estate involves a lot more in the way of tasks and higher fees. Do not make this a “low bid” decision, however. Balance the service and reputation of the custodian with the fees.
  • Account Management – what sort of reporting will you receive, and do they offer some type of online access to your account to track activities and performance?
  • References – ask for references, testimonials, or referrals. How their current and past clients feel about them is good information.

Take the time necessary and do your due diligence in choosing a custodian for your self-directed retirement account.

i Treasury Regulation Section 1.408-2(e), to serve as nonbank trustees or custodians. 

ii Questions to Ask Custodian, Equity Trust website

iii Self-Directed IRAs and the Risk of Fraud, SEC.gov

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