Understanding the role of an IRA Custodian

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An IRA custodian acts as a non-discretionary entity in the financial services market as it merely executes the investment decisions taken by the IRA owner and performs various custodial and administrative duties to ensure that the ‘tax-deferred’ status of an IRA is preserved. The custodian functions as a passive body that neither solicits investments nor provides advice or recommendations to customers. According to the IRA agreement there are some limitations on the responsibilities of an IRA custodian:

  • It does not recommend or endorse an investment or investment advisor
  • It does not perform due diligence for the account owner or the investment sponsor
  • It does not determine the suitability of an investment

An IRA custodian performs the following functions for its IRA account holder:

    1. Documents and keeps a record- It maintains IRA agreement and forms, accepts, documents, and records contributions, transfers and rollovers from other IRAs/retirement plans, holds documents such as subscription agreements, operating agreements, offering memorandum, promissory notes, certificates, and other evidences of ownership of investments by the IRA and receives as well as records income from the assets held in the IRA.

 

    1. Secures Investments- It implements technology and procedures to protect the privacy of account owner and account data and executes account owners’ investment instructions as directed by sending funds from the IRA to the client selected investments. It is its responsibility to facilitate, as directed by the account owner, distributions from the IRA to the account owner or transfers to other IRAs or retirement plans. It performs tax reporting of IRS Forms and provides IRA statements to the account owner which includes transactions and cash and assets held in the account.

 

    1. Provides Technical and Administrative Support- An IRA custodian executes account owners’ investment instructions as directed by sending funds from the IRA to the client selected investments. It also ensures that it coordinates with investment sponsors the purchase and sale/liquidation of investments as directed by account owner.

 

While choosing a custodian for an IRA account the prospective investor must remember that the choice of the custodian should depend on the type of investment to be made and the corresponding involvement of the custodian while going forward. For instance, if an IRA account holder opts for the IRA owned LLC to gain maximum control of the investment decisions; it is always advisable to pick a low costing custodian as it will not be involved in the decision-making process on a daily basis. Moreover, though they are not supposed to extend any investment advice, sometimes the IRA custodians do provide information that might either be partial or incomplete so as to ‘sell’ the IRA product in question and their employer services. Thus, it always helps an IRA owner to seek advices from legal experts regarding the investment decisions instead of completely relying on the custodian.