IRA Custodians: What You Need to Know

Although the IRS has set forth the duties required of non-bank trustees in Internal Revenue Code Section 408(a)(2), not all custodians are regulated by the IRS.  Some custodians don’t even ensure that an IRA complies with the law.  When there is a problem, a court often sides with the errant custodian.  If IRA custodians can be let off the hook so easily, what’s an investor to do?

IRA owners expect that the custodian they hire will prevent them from engaging in prohibited transactions and help them satisfy other requirements such as taking annual RMDs.  We are now seeing that some custodians don’t do those things at all. To the contrary, some self-directed IRAs being touted on the Internet are even promoting transactions that could be interpreted as self-dealing (and in violation of the law).

There is one thing clients can be sure of...if an IRA is scrutinized by the IRS and found to be in violation, it is not usually the custodian that will be on the hook.  If the IRA is disqualified, it will result in a taxable distribution of the entire account and the IRA owner will be subject to taxes and possible early distribution penalties.

As part of your overall retirement planning checkup, make sure your IRAs are with custodians who allow beneficiary flexibility. If your custodian doesn’t offer what you want, consider finding a custodian who is multi-generational friendly.

IRA Custodians: Some General Areas of Questioning
Entity Details
Who are you (bank, brokerage firm, nonbank trust company) and how are you regulated? How are you insured (FDIC, SIPC)? Do you have errors-and-omissions insurance? Are you audited? How and by what entity? When was the last audit completed?

Accounts
How are accounts managed?  How are investments processed?

Costs
What are your fees? Do your annual fees include all charges, or are there any hidden fees for transactions or for administration costs or uninvested cash? Do you charge based on each transaction, or on the value of the account?

Forms
Do you require your own beneficiary form, or will you accept as valid a detailed, customized beneficiary designation created by an attorney or advisor?

Distributions
In the event of death, will you permit beneficiaries to receive payments over the period permitted by tax law and IRS rules and regulations, or will you mandate a shorter payout period?