The Internal Revenue services (IRS) has made it mandatory to have a custodian for any individual retirement account, irrespective of whether it is self-directed or not. The Self Directed IRA custodian could be a bank, trust, financial services company, insurance company or any other company into finance that has the required permission from IRS to serve as a Custodian.
The custodian will hold the assets purchased by the IRA and not the account owner. Unlike a traditional IRA, where the custodian would decide your investment portfolio, in case of a self-directed IRA, you can direct your money at your discretion.
The primary function of the custodian in the case of a self directed IRA is to carry out the administrative work and maintain legal compliance. The custodian would be required to manage and publish the accounts of the IRA and also monitor whether the transactions that are done under the IRA adhere to the Internal Revenue Service’s (IRS) rules and regulations. If the IRA owner takes a distribution, it is custodian’s job to withhold the federal tax as mandated by the IRS. A custodian would also supervise the contributions to the IRA to comply with the limits set by the IRS.
Annual Reporting Requirements mandated by IRS
Form 1099 – A custodian is expected to carry out the desired paper work mandated by the IRS. The 1099 form which reports to the IRS any distribution the IRA owner takes from his account. If an IRA owner executes a roll over from his account, it is considered to be a distribution and the custodian would have to do the mandatory filing.
Form 5498 – This form is meant to report the contributions that the IRA owner has made during a particular tax year. Any rollover that has happened into the IRA is also treated as contribution and hence has to be included in Form 5498. The form would also include details on the Fair Market Value (FMV) of the assets held under the IRA. This form has to be submitted annually. The custodian may seek support from the IRA owner to execute some of these formalities.
Custodian would charge you an annual fee – A custodian would charge you an annual fee for fulfilling the administrative and compliance related responsibilities. Not all custodians would offer you the same type, quantum and standard of services and hence the fees would vary accordingly.
At Self-Directed Retirement Plans, we help you with the necessary formalities and paperwork and guide you regarding invest opportunities. This is included in our set up fee and we welcome our client’s questions.