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.
Want to learn more about the differences between administrators and custodians?visit our FAQ page