A custodian is critical to an individual retirement arrangement to maintain the tax-deferred or tax-free status of the account. The type of custodian, who is also called the trustee, will be different depending on the type of IRA investments you choose to make. More traditional types of investments will probably not require any effort in choosing a trustee, but if you want to make investments outside of the usual mutual fund or stock investment, you will need a self-directed IRA custodian.
Required for IRA
An IRA is a custodial account, and it requires a custodian to maintain its tax-advantaged status. The custodian ensures that all of the investments are approved by the Internal Revenue Service and also completes all of the required reporting and paperwork for the taxing authority. The custodian serves as the basic overseer of the account and also handles functions such as sending statements of investment performance and buying and selling investments for the IRA.
Banks, Brokerages and Mutual Funds
Most institutional providers of IRA accounts will serve as trustees for the accounts that they provide. This includes most banks and mutual fund companies, as well as many brokerage firms. This makes opening an IRA account at one of these establishments an easy process, usually as simple as completing a form and then giving the institution your opening deposit, or arranging for a transfer of funds from a 401(k) or other retirement account.
You have many different types of investment choices for an IRA, including investments not offered by financial institutions or mutual fund companies. Examples include real estate and some types of gold investments. To invest in these vehicles with an IRA requires a self-directed IRA custodian. This is a person or company that allows you to choose your own investments. You give the custodian your IRA investment, which may be your annual contribution but is often a rolled-over 401(k) or other IRA account, and the trustee invests the money in the IRA-approved investments you choose. The custodian is responsible for making sure that your account follows IRS guidelines, as well as issuing all statements and required tax forms.
Choosing a Custodian
Your choice of custodian depends on what you wish to do with your IRA. If you are choosing a bank account for your IRA, the bank you choose should be fine as a trustee. The same is true if you wish to invest in a particular mutual fund family. Using these custodians will save you money as well, as the trustee fees tend to be lower with institutional accounts. If you need a self-directed trustee, choose one who has experience working with the types of investments you will be making. Some trustees may offer additional services, such as property management or storage for gold investments, for extra fees.