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How to Find a Custodian for a Self-Directed IRA

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A self-directed IRA allows you to invest in a wider range of assets, including real estate and other alternatives.

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 may be trust companies that are approved by the IRS, allow for alternative – and sometimes riskier – types of investments usually unavailable in traditional IRAs.

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. For example, the custodian must 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 2024, IRA contributions are capped at $7,000, with an extra $1,000 allowed if you’re 50 or older. In 2023, the IRS allowed up to $6,500 in IRA contributions, plus the extra $1,000 for savers 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) has warned of 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.

Alternatively, 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 70 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, the 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

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

There aren’t many firms that are available to be custodians of self-directed IRAs. That said, alternative investments in self-directed IRAs are generally higher risk than normal exchange-traded funds (ETFs), bonds and stocks. Besides the risks, there are SEC rules that specifically govern self-directed IRAs. Finally, the firms that want to serve as custodians to your self-directed IRA are not all created equal. Fraudsters use numerous guises to mask their intentions and lack of qualifications, so it’s important to do you research and proper due diligence.

Retirement Savings Tips

  • Retirement is one of the most important phases of your life to prepare for wisely. And once in retirement it’s key to make the right financial moves. A financial advisor can offer valuable insight and guidance in such circumstances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re not sure what the various terms mean in the literature about retirement and tax-advantaged plans, check our dictionary of some of the most common ones.

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