A custodian is required for all IRAs. All IRAs must be held by a custodial entity, such as a bank, credit union, trust company, or entity that is authorized and regulated by the IRS as a “non-bank custodian.”. Custodians are essential in any individual retirement account (IRA) arrangement to maintain a tax-deferred or tax-exempt status. Custodians, also called trustees, vary by type of IRA.
Marketable securities, such as mutual funds or stocks, require no effort to choose a custodian; however, IRAs that have alternative investments, such as private notes, precious metals or real estate, need a self-directed IRA custodian. The depositary of an IRA is a financial institution that holds investments in an account for safekeeping and ensures that all government and IRS regulations are met at all times. The IRS requires that your IRA have a custodian. It is the depositary's responsibility to execute investment decisions made by the owner of the IRA and to ensure that all investment requests and account activities are carried out in accordance with regulatory requirements established by the IRA.
An IRA custodian is a financial institution authorized by the IRS to provide custody services and hold assets on behalf of IRA owners. According to IRS rules, an IRA must have a custodian, who can be a bank, a mutual fund company, or a brokerage firm. The IRA depositary is responsible for buying and selling investments on behalf of the investor in an IRA and for ensuring that the IRA complies with IRS regulations. The custodian charges a fee for providing escrow services and managing investments on behalf of the investor.
A custodial IRA is an individual retirement account that a custodian (usually a parent) has for a child with earned income. Once the custodial IRA is opened, the custodian manages all the assets until the child turns 18 (or 21 in some states). All of the funds in the account belong to the child, allowing him to start saving money right from the start. In addition to taking advantage of the benefits of combined growth, your child may be able to use the funds for future expenses, such as college tuition, or even to buy a first home.
You can open a Roth IRA with custody or a traditional IRA with custody, and the appropriate account rules and benefits will apply. Traditional IRAs allow account holders to contribute pre-tax income to their IRA, and investment growth tax is deferred until retirement when they retire. Generally, it's best to have Roth IRAs when the account owner could retire in a state where income taxes are higher, or if there is speculation that income taxes could increase in the future. Once the right IRA and investments are chosen, the main factors that will distinguish one custodian from another are investment options, fees, and customer service.
It's important to note that the IRS only authorizes custodians to hold (or “guard”) the assets in their IRA account. Like an administrator, a facilitator also acts as an intermediary between the owner of the IRA and the depositary. In general, both brokerage firms and insurance companies can be a good choice as IRA custodians when the account owner wants to actively invest in individual stocks, bonds, ETFs, annuities, and mutual funds. The same contribution and distribution rules that apply to traditional and Roth IRAs also apply to custodial IRAs.
If you choose to open a self-directed IRA, you can choose alternative investments that are different from those available in a standard IRA. Managing an IRA can be frustrating if there are no knowledgeable specialists to answer your questions. Like traditional IRAs, self-directed IRAs are governed by rules, but not everyone defines a self-directed IRA in the same way. However, regardless of the type of IRA you have, the IRS requires that you have a depositary to manage your IRA investments and provide custody services for your IRA assets.
Roth IRAs are retirement accounts in which the owner pays taxes on the money deposited in the account (after-tax contributions) and, therefore, all withdrawals are tax-exempt. A self-directed IRA is just a term that describes an account that allows you to do what you want to do, but, again, this term is not legally defined and its meaning is not universally accepted. A manager is an intermediary between the owner of the IRA and a custodial partner who owns the IRA's assets. .