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Here's how to pick the best custodian for a self-directed IRA.

A self-directed IRA can give workers more control over their retirement plans, but they’ll still need a custodian. For the self-employed or the financially savvy, a self-directed IRA offers more investment options than a standard IRA. Since the IRS requires a self-directed IRA to have a custodian, investors may want to know what that task involves and who to trust.

Self-Directed IRA Rundown

Both a traditional IRA and a Roth IRA let workers hold standard investments like stocks and bonds. A Roth IRA allows you to make tax-free withdrawals in retirement, while a traditional IRA allows you to deduct contributions.

However, IRS rules limit the types of products an IRA can cover. A self-directed IRA has the same tax benefits as a traditional IRA, but with fewer restrictions. For example, a can include private businesses and real estate among its holdings.

Self-Directed IRA Custodian Facts

Here's how to pick the best custodian for a self-directed IRA.

A bank or brokerage firm can be a self-directed IRA custodian. A savings and loan corporation or credit union can do the job as well.

But no custodian of a self-directed IRA will advise you on how to invest. It’s still “self-directed,” so an investor will have to assess the risk and make decisions themselves. Investors will also have to figure out the tax implications of their various investments on their own.

Self-Directed IRA Custodian Risks

The SEC recently issued an investor alert concerning potential fraud risk in self-directed IRAs. According to the report, some self-directed IRA custodians misrepresent their jobs to deceive investors. They aren’t supposed to be advisors, but still mislead investors about the value of alternative investments like metals and real estate.

Other custodians have been sued for duping people into investing in unregulated securities or committing fraud. At their worst, duplicitous custodians have run Ponzi schemes and used investor funds for living expenses.

Picking a Self-Directed IRA Custodian

The SEC warns investors to check the licensing and registration of potential custodians against SEC or state regulatory resources. Be wary of investment promises that sound too good to be true, or sketchy offers and tips.

From there, start shopping around for a self-directed IRA with up-ront costs that fit your price range. Make sure you’re picking a custodian with the right expertise, as a firm that focuses on precious-metals IRAs may not be the right one for your real estate investments.

Finally, since a custodian isn’t an advisor, you may want to consider bringing in a financial advisor. They may be able to help you with the trickier aspects of your new newfound investment freedom.

Finding a Self-Directed IRA Custodian

Here's how to pick the best custodian for a self-directed IRA.

A financial advisor could point the way to a custodian, but the IRS lists nonbank trustees for investors who don’t want help. Just realize that not all will accept your portfolio, and that some are administrators and not custodians. A self-directed IRA administrator is not allowed to  hold your funds, and the difference is crucial.

Bottom Line

There are dozens of companies that want to serve as custodian to your self-directed IRA. Not all of them are created equal. Do your homework and consider the risk before seeking a custodian.

Self-Directed IRA Custodian Tips

  • If you still aren’t sure a self-directed IRA is working out for you, it may be time to talk to a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Start saving for retirement early. No matter which retirement savings account you settle on, it’s always better to start saving sooner than later. The sooner you invest your money, the more time you have to reap the benefits of compound interest. This can have a big impact on your retirement savings.

Photo credit: ©iStock.com/designer491, ©iStock.com/Geber86, ©iStock.com/psphotograph

Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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