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IRA rules: the differences between IRA custodians & administrators

Custodians vs. Administrators for your self-directed IRA

One of the most confusing aspects of the self-directed IRA industry is understanding the differences between the types of IRA providers that are available – Custodians and Administrators. Federal law requires that all IRAs have an appointed custodian. Custodians, like STRATA Trust Company, must meet IRS requirements and are regulated by state and/or federal banking regulators. Custodians are generally banks and trust companies, and are responsible for:

  • Setting up your account
  • Depositing your funds
  • Processing your investments
  • Ensuring your assets are titled correctly
  • Fulfilling the IRS reporting requirements
  • Issuing periodic statements of your account activity

On the flip side, Administrators are middle men that must contract with a custodian to provide their services. Administrators are not directly regulated by state or federal banking regulators and do not have onsite safety and soundness examinations conducted for their operation.  While many Administrators blur the lines by providing many of the same services as Custodians, the key differences are that Administrators do not have the authority to hold customer funds in pooled accounts or hold title to customer assets in their name. This activity by Administrators creates the risk for fraudulent or unsound activity.

One needs to look no further than the receivership case involving American Pension Services to understand the risk of what can happen when using an Administrator. The bottom line? Since an IRA must have an appointed Custodian, you should seek the services of a regulated trust company or bank when considering a self-directed IRA.

See the chart below for a bigger picture of the differences between Custodians and Administrators.

 

 

Primary differences between administrators and custodians

As custodians we don’t recommend that our clients use an IRA administrator to handle funds, but because we believe in full transparency, we encourage everyone to learn the key differences between the types of IRA providers.

Comparison of IRA Custodians and Administrators
Custodian  Administrator What you need to know
Approved by the IRS? Yes No Banks and trust companies have automatic approval as an IRA custodian because they are subject to oversight by state or federal bank regulators. Administrators must contract with an IRA custodian to provide their services which can pose delays and unnecessary risks to customers.
Allowed to custody assets? Yes No Many administrators actually hold title to customers’ IRA assets in their name, and this simply is not permitted. It can pose additional risks to customers. Assets should always be maintained in the name of the IRA custodian.
Allowed to hold custodial (uninvested) cash? Yes No Many administrators actually hold customers’ uninvested cash in pooled bank accounts in their name. Again, this should not be allowed and poses potential risks to IRA owners. Customers’ uninvested cash should always be maintained in the name of the IRA custodian.
Subject to federal or state bank regulator oversight? Yes No Quite a few administrators claim to be regulated, but the fact is they do not have onsite safety and soundness examinations conducted by bank regulators to review their financial stability, as well as their operational, compliance and risk management programs.
Maintains comprehensive insurance package? Yes May not As a regulated financial institution, IRA custodians must maintain comprehensive insurance as a safeguard in the unlikely event of employee dishonesty or error.
Conducts internal and/or external audits? Yes May not IRA custodians are required to have adequate internal and external audits performed to ensure sound controls are in place for financial health, operational compliance, information security and risk management.
Complies with IRS and DOL statutory requirements? Yes May not IRA custodians are required to comply with IRS and DOL statutory requirements. Custodians typically perform administrative reviews of customer’s investment purchases to look for potential risks of prohibited transactions, and if necessary, may request customers obtain a legal opinion. Prohibited transactions can disqualify an IRA’s tax exempt status and carry significant taxes and penalties.
Complies with federal BSA/AML, CIP and Patriot Act rules and requirements? Yes May not IRA custodians are required to develop, administer and maintain an effective program for compliance with all OFAC and FinCEN monitoring as well as all requirements of BSA/AML, CIP and Patriot Act.
Maintains information security policy to protect its customers? Yes May not As regulated financial institutions, IRA custodians are required to maintain adequate information security policies and procedures to protect customers’ personal and financial information.
Maintains disaster recovery/emergency preparedness plan to ensure business continuity? Yes May not IRA custodians are required to develop, administer and maintain effective disaster recovery/emergency preparedness plans to help get the business back up and going in the event a natural or man-made disaster disrupts normal operations.
Conducts annual employee training on Bank Secrecy Act/Anti Money Laundering, Customer Identification Program, Information Security, and Disaster Recovery? Yes May not IRA custodians are required to conduct training for new employees as well as provide ongoing annual training on these compliance topics.

Want to learn more about the differences between administrators and custodians?

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Want to know more about the role of custodian?

We’re always happy to discuss the benefits of working with a custodian and how STRATA can help empower your financial future.

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