A Custodian's Limited Role
As an initial matter, a self-directed IRA custodian has a limited role as it relates to evaluating any investment. A custodian will only determine whether the investment is administratively feasible –simply stated, whether the investment fits within the custodian’s operating systems and procedures and whether the custodian can fulfill its government reporting obligations (i.e., to report the IRA’s fair market value or good-faith estimate of fair market value). For its own internal purposes, a custodian may choose to – but is not required to – investigate the validity of an investment, the background of any investment promoter or the accuracy of any financial information provided by the investment promoter.
Custodial Responsibilities
Once a custodian determines it will custody an investment, a custodian’s obligations are limited to:
- Accepting, documenting, and recording contributions, transfers and rollovers from other IRAs/retirement plans
- Implementing technology and procedures to protect the privacy of the accountholder and account data
- Executing accountholders’ investment instructions as directed by sending funds from the IRA to the client selected investments
- Gathering, executing, and holding documents such as subscription agreements, operating agreements, offering memorandum, promissory notes, certificates, and other evidences of ownership of investments by the IRA
- Receiving and recording income from the assets held in the IRA
- Executing accountholders’ instructions to sell, withdraw from or liquidate investments held in the IRA
- Coordinating with investment sponsors the purchase and sale/liquidation of investments as directed by accountholder
- Facilitating, as directed by the accountholder, distributions from the IRA to the accountholder or transfers to other IRAs or retirement plans
- Performing tax reporting of IRS Forms 1099-R and 5498 as required by the IRS
- Providing IRA statements to the accountholder which includes transactions and cash and assets held in the account
- Complying with all applicable state and/or federal regulations
WHAT A CUSTODIAN DOES NOT DO
Now that you understand what a custodian is responsible for, it is important to know what a custodian does not do. Custodians do not:
- Act as an investment advisor, tax advisor or legal advisor
- Provide investment, tax or legal advice
- Recommend or endorse investments
- Recommend or endorse investment advisors
- Determine the fair market value of account investments
- Perform due diligence for the account owner on any investment or investment sponsor
- Determine the merits or suitability of any investment for the IRA or the accountholder
- Determine whether a transaction would be deemed a Prohibited Transaction (i.e., transactions that are prohibited by the IRS). Refer to IRS Publication 590 or Code section 4975 for more information).