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

Want to invest the assets in your individual retirement account (IRA) in private placement securities, real estate or even crypto? You can, but you’ll need to find a custodian for what’s known as a self-directed IRA. These custodians, which tend to be trust companies that are approved by the IRS, allow for these types of alternative investments. There aren’t many, though they seem to be growing in number over time. That said, alternative investments are generally higher risk than normal ETFs, bonds and stocks. So even if you’re an experienced and knowledgeable investor, speaking with a financial advisor could be helpful.

Understanding Self-Directed IRA Custodians

A custodian must hold the assets in an IRA, whether it’s a traditional IRA, Roth IRA or self-directed IRA. That’s partly so the IRS can ensure that owners are following contribution limits, age requirements and other IRA rules. The custodian has the duty to, say, report early withdrawals to the IRS. It also must make sure that people do not contribute more than what’s allowed in a year. For 2021, IRA contributions are capped at $6,000, with an extra $1,000 allowed if you’re 50 or older.

Typically, banks, brokerages, mutual fund companies and trust companies are the custodians for traditional and Roth IRAs. They limit the assets in IRAs to relatively less risky investments, such as mutual funds, exchange-traded funds, bonds and publicly traded stocks.

Trust companies also serve as custodians for self-directed IRAs, but they tend to be   comparatively small and with low profiles. While they allow for alternative investments such as cryptocurrencies and private placement securities, they provide fewer protections and no oversight. After all, the responsibility of a self-directed IRA is meant to be in the hands of the individual account owner.

Not surprisingly, people who save for retirement using a self-directed IRA tend to be sophisticated investors. That’s because the onus is placed entirely on them to invest in more complex securities.

What Are the Risks of a Self-Directed IRA Custodian?

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

The Securities and Exchange Commission (SEC) recently issued an investor alert concerning potential fraud risk in self-directed IRAs. Self-directed IRA custodians are not responsible for verifying the legitimacy of investments or the accuracy of claims. They do not provide the same protections that, say, Fidelity and TransAmerica provide their IRA customers. Yet swindlers, taking advantage of people’s lack of knowledge and confusion, claim that they have been vetted by self-directed IRA custodians.

Alternately, fraudsters may claim to be IRS-approved custodians. They may say that they protect against losses or they may recommend investments. But legitimate custodians do neither. Custodians of self-directed IRAs only hold and administer assets in accounts. That is all they do. So if someone claiming to be a custodian offers any kind of investment advice, be wary.

How to Find and Choose a Self-Directed IRA Custodian

As mentioned earlier, all custodians of self-directed IRAs must be approved by the IRS. So if you are starting from scratch, the first place to go is the agency’s list of approved nonbank trustees and custodians. Currently, there are around 60 firms. They are not all custodians for self-directed IRAs, but all legitimate custodians must be on this list. You’re probably safest going with names you recognize.

Once you have some firms in mind – whether from first finding them on the IRS list or just checking them against the list, you’ll want to do some more homework. Look up the licensing and registration of potential custodians using SEC, Financial Industry Regulatory Authority and state regulatory resources. Also see what the Better Business Bureau has to say about them.

Additionally, SEC recommends consulting an investing professional or lawyer. Both will give you an objective opinion and may know about the reputation of certain custodians.

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.

Retirement Savings Tips

A legitimate self-directed IRA custodian makes no promises about earnings or growth.

  • Planning for retirement goes way beyond just savings. It also covers income planning, tax management and more. A financial advisor can help with this and more. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If an alternative investment sounds too good to be true, it probably is. This is the case especially if the offer guarantees you can’t lose money. The SEC recommends avoiding any unsolicited offers you receive in the mail, in your email or over the phone.

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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