Your Self-Directed IRA Needs a Custodian

Estimated reading time: 2 minutes, 11 seconds

by Tara Bogard, Business Development Officer

Why does your Self-Directed IRA need a custodian? The easy answer to that is this: because the government says so. However, that answer usually leaves us with even more questions, especially ones asking why your IRA is required to have a custodian.

All qualified accounts are required by law to have a custodian.

Below is a list of account types that are deemed qualified accounts by the IRS:

  • Traditional, SEP, SIMPLE and Roth IRAs
  • Qualified Retirement Plan Custodial Account
  • 403(b)(7) Custodial Account
  • Archer Medical Savings Account
  • Health Savings Account
  • Deferred Compensation Plan of State and Local Government and Tax Exempt Organizations Custodial Accounts
  • Coverdell Education Savings Account

When Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 allowing individuals to self-direct their IRAs, it began an era of offering incentive to those proactive in saving money for retirement. The incentive for these accounts is various tax advantages. In order to qualify for those tax advantages, however, one must follow rules set forth by the IRS in Publication 590-A and 590-B.

Custodians were established to assist the IRS in administering the rules. Although some custodians are fiduciaries to the accounts they custody, many are not. Those that are not are typically directed custodians and do not provide, promote, endorse or sell investment products and do not endorse or promote any individual investment advisor or investment sponsor.

The custodian keeps record of transactions such as contributions, 401(k) rollovers, transfers, distributions and any investments that you make through your IRA. The custodian also provides some reports to the IRS. For example, the custodian files Forms 1099 and 5498 annually and provides copies to their account holders. Form 1099-R shows any distributions that have been taken from your accounts as well as rollovers from one IRA to another qualified retirement account. Form 5498 represents any contributions made to your account throughout the year, as well as the fair market value of your account. It is the responsibility of the client to provide the custodian with an accurate fair market value for his or her IRA account.

An IRA custodian can either be an IRS-approved custodian or a “bank” as defined by Section 408 of the Internal Revenue Code. Kingdom Trust, a South Dakota-chartered public trust company, is such a bank.

The client must ensure his or her account remains IRS compliant, which is essential in continuing to grow one’s tax-advantaged dollars. If you have any further questions about using a custodian like Kingdom Trust, please contact me at [email protected]. And if you are ready to open a Self-Directed IRA, click here for our online application or call us at 888.753.6972 today!

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