How Custody Works for Alternative Investments

Understanding directed custodians

Not all IRA custodians are alike, and when it comes to self-directed IRAs (SDIRAs), those differences matter more than many investors realize. Most traditional financial institutions limit IRAs to familiar assets like CDs, mutual funds, and publicly traded securities. Fewer offer true self-directed IRAs, which allow access to a broader range of alternative investments.  Understanding how custody works and how custodians differ can help you choose one that aligns with your investment strategy and long-term goals.

In an SDIRA, most custodians operate as directed custodians—meaning they act on your instructions, rather than making investment decisions on your behalf.

The IRA custodian’s role

To satisfy federal requirements, every IRA must be held as a trust or custodial account by a qualified financial organization in the United States and governed by state or federal regulations. While the IRS treats trust accounts and custodial accounts the same for IRA purposes, the organization behind the account plays a critical role in compliance and administration. Like all IRA custodians, STRATA Trust Company administers accounts in alignment with IRS requirements. Those rules include requirements such as:

• The IRA agreement must be in writing
• Annual contribution limits must be followed
• Rollovers must meet strict timing and frequency rules
• IRA assets must be nonforfeitable
• Certain assets, such as collectibles, are prohibited
• Traditional IRA owners must take required minimum distributions (RMDs) once they reach age 73
• Beneficiaries must follow detailed distribution rules

Like most custodians that support alternative investments, STRATA operates as a directed custodian and acts as a neutral third party. We hold and administer your IRA but do not buy, sell, or trade investments, provide investment, tax, or legal advice, or determine whether an investment meets IRS requirements. 

Here’s a simple way to understand the key responsibilities when self-directing alternative investments:

Key takeaway: You control the investment decisions. The custodian supports the administration.

Why SDIRAs are different

SDIRAs allow investors to hold a wide range of alternative assets, as long as those investments are not prohibited by the Internal Revenue Code or IRS regulations. Common SDIRA investments include:

• Real estate, including residential, commercial, and raw land
• Limited liability companies (LLCs)
• Precious metals such as gold, silver, and platinum bullion
• Promissory notes and private lending
• Private equity and venture capital

These expanded options can be powerful tools for diversification and long-term growth. At the same time, they introduce greater complexity. Many financial institutions simply are not equipped to administer assets that fall outside traditional investment models, which is why custodians choose to restrict certain alternative investments and have more standard offerings.

• IRS rules - Prohibited transactions are far more common in SDIRAs, often because the rules are unintuitive. A prohibited transaction can occur if an IRA buys from, sells to, or otherwise transacts with a “disqualified person.” Disqualified persons typically include the IRA owner, certain family members, and entities they control. These are often the very people investors naturally want to do business with—making missteps easy. Even routine situations can create issues. For example, if your SDIRA owns a rental property:

  • You cannot personally perform repairs or provide services
  • You cannot pay expenses out of pocket and reimburse yourself later
  • All expenses—repairs, maintenance, taxes, and insurance—must be paid directly from the IRA

  
  Understanding these boundaries is essential to maintaining the tax-advantaged status of your account.

• Special reporting and tax considerations - Some SDIRA investments generate income that may be subject to special taxes. If an IRA owns an operating business or debt‑financed real estate, it may owe tax on unrelated business taxable income (UBTI) or unrelated debt‑financed income (UDFI). 
  
  While custodians are not responsible for calculating or paying these taxes, experienced SDIRA administrators understand when UBTI or UDFI issues are likely to arise and can help accountholders recognize when additional professional support may be needed. 

Choosing the right SDIRA custodian

Not all SDIRA custodians offer the same level of experience, infrastructure, or support. STRATA, for example, is a Texas-chartered trust company regulated by the Texas Department of Banking, offering the flexibility to hold both traditional and alternative assets with a single custodian.

As a regulated trust company, STRATA adheres to strict standards for safety and soundness, providing investors and financial professionals confidence in the integrity of the custody process. Our experienced team supports investors in navigating the complexities of alternative assets within tax-advantaged accounts, delivering a streamlined experience backed by responsive service and deep operational expertise.

Explore STRATA’s Knowledge Center or speak with our team to learn more about what sets STRATA apart, SDIRAs, and alternative investing.