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THE ROLE OF A CUSTODIAN IN A SELF-DIRECTED IRA

In previous blog posts, I have discussed Self-Directed IRAs in depth, but now I would like to look at the role of a Custodian in a Self-Directed IRA. Here is a list of five things to know about the role of a Custodian:

  1. Management and Custody of Assets: A custodian is responsible for the management and disposition of property held in a self-directed IRA. This includes maintaining custody of the IRA assets, keeping required records, and processing transactions involving IRA assets. The custodian’s role is fundamentally important to ensure independent oversight and to protect retirement savings from being misused by the IRA owner.
  2. Fiduciary Duties: If the IRA is structured as a trust, the custodian has fiduciary responsibilities regarding the investment. However, if the IRA is a custodial account, the custodian’s duty is limited to holding and safeguarding the investment, without responsibility for investment decisions, which can be directed by the IRA owner.
  3. Prohibited Transactions: Custodians must ensure that transactions involving IRA assets comply with IRS regulations to avoid prohibited transactions, which can result in taxable distributions and penalties.
  4. Reporting and Compliance: Custodians are required to maintain records, file necessary reports with the IRS, issue client statements, and assist clients in understanding the rules and regulations pertaining to prohibited transactions.
  5. Legal and Tax Compliance: Custodians must comply with specific IRS regulations which detail the requirements for custodial accounts to be treated as trusts and the fiduciary conduct expected of custodians.

In short, the custodian’s role is crucial in ensuring the proper management, compliance, and safeguarding of assets within a self-directed IRA, while allowing the IRA owner to direct investment decisions within the regulatory framework.