The depositary of an IRA has full possession of the assets; that is, the most common example would be a bank whose investments in an IRA are limited to its own deposits. An IRA manager is generally empowered to make investment decisions. The trustee is responsible for managing and maintaining the trust's property, while the custodian is only the entity that owns the assets. When you open a trust, you must designate a trustee to oversee the trust's activities, including managing, selling, and distributing the trust's assets to beneficiaries.
The assets are in the hands of the custodian, who is a financial institution such as a bank or brokerage firm. The custodian is limited to administrative services and generally does not have the power to make investment decisions. Pursuant to section 408 of the Internal Revenue Code (IRC), an IRA can only be established and managed by a bank, financial institution, or trust company authorized in accordance with state law. An IRA trustee, also known as a custodian, is the institution that manages your retirement account.
By law, every individual retirement account must have a custodian or a trustee. A trustee manages assets on behalf of the beneficiary of a trust, estate, or other party. A custodian is the entity that actually holds the assets in question for custody. Custodians are essential in any individual retirement account (IRA) arrangement to maintain a tax-deferred or tax-exempt status.
Custodians, also called trustees, vary by type of IRA. Marketable securities, such as mutual funds or stocks, require no effort to choose a custodian; however, IRAs that have alternative investments, such as private notes, precious metals or real estate, need a self-directed IRA custodian. The depositary of an IRA is a financial institution that holds investments in an account for safekeeping and ensures that all government and IRS regulations are met at all times. Managers and facilitators act as intermediaries between you and an associate custodian who actually owns the assets.
So, if you intend to open a self-directed IRA, you'd better stay with a true custodian. . However, IRAs already have tax advantages, so the tax advantages of annuities are not necessary within an IRA and you can pay high fees for having one. In other words, to set up an individual retirement account, you must open the IRA at a bank, financial institution or authorized trust company, such as IRA Financial Trust.
On the other hand, IRA Financial Group can facilitate your self-directed IRA with a different custodian if you so choose. The IRA depositary is responsible for complying with all IRA-related IRS reporting requirements. You should open a self-directed IRA with a special custodian called a passive custodian or custodian of a self-directed IRA that allows you to make investments in alternative assets, such as real estate. Because self-directed IRAs allow for a variety of investment options, they can provide greater diversification than standard IRAs.
While for most people there is very little difference between an IRA depositary and a trustee, Tom Anderson, CEO and founder of PENSCO Trust Company, says one important difference is that a trustee can take over the full management of IRA investments and offer financial advice. In addition, a depositary of a self-directed IRA will also be responsible for paying all expenses, such as property taxes on a real estate investment, with respect to the IRA transaction. .