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Know the Difference: IRA Custodians vs. Other Types of IRA Companies

  |  By Mat Sorensen

As self-directed IRA services grow in popularity, numerous types of IRA companies have popped up to meet this demand. Today, there are IRA custodians, IRA administrators and IRA facilitators. At first glance, it may appear that all of these entities follow the same IRA rules and provide the same basic service. But the reality is that they are not the same—and the distinction between them can have a huge impact on you as the self-directed IRA investor.

How do you decide which type of company may be the best self-directed IRA provider for you? First, understand whether the company you’re vetting is an IRA custodian, an IRA administrator, or an IRA facilitator. In general, these entities represent varying levels of service, expertise and regulatory oversight—with custodians at the top of the provider pyramid (see below).

 


What does an IRA custodian do?

IRA custodians are regulated entities—things like trust companies, banks and IRS approved broker dealers—are permitted to custody, which means to “hold” assets on behalf of the account owner. Custodians are regulated by state or federal banking departments and are subject to annual audits, capital requirements, and adequate insurance and bonding rules. IRA custodians typically offer the most comprehensive IRA services in terms of helping clients set up accounts, make investments and maintain paperwork related to the investments (which, when it comes to alternative assets, is no small feat). Because custodians are subject to regulatory oversight, they are legally responsible to comply with all the rules, regulations and laws pertaining to IRAs.

What does an IRA administrator or IRA facilitator do?

IRA administrators and IRA facilitators provide similar services to a custodian because they need to work with a custodian that will actually hold the assets in an self-directed IRA.  They are not able to custody assets and are not overseen by banking regulators. In many instances, IRA investors who use an administrator or facilitator have no idea who the actual custodian of the IRA and its assets is. Both types of companies essentially act as intermediaries between the investor and a partner custodian. IRA administrators, as the name suggests, primarily process paperwork and provide other administrative functions. Facilitators most often specialize in helping investors set up single member LLCs and C Corporation IRAs.

IRA Custodians vs. Other Types of IRA Companies: Why These Differences Matter

Transparency is the main difference.  Because IRA administrators and facilitators are required to work with a custodian, investors should be aware of this and be fully informed about where exactly the assets in their account are being held and by whom.  In addition, whenever there are multiple entities involved in complex transactions, there is a greater possibility of an error.  While this may never become an issue, should a problem arise with your account or an asset you hold, knowing exactly who is responsible is important.

The regulatory requirement also mandates operational controls for custodians. They are required to pass periodic exams and demonstrate strong internal controls including an audit function. To see if your self-directed IRA trust company is a custodian you can check the state banking website where the company is registered. For example, PENSCO is registered with the Division of Banking in Colorado which you can see in Colorado’s Department of Regulatory Agencies website.

PENSCO Trust Company falls into the category of IRA custodian (in fact, one of the first to specialize in holding alternative assets like real estate or private equity).

One of the most important decisions a new self-directed IRA investor can make is in choosing the right provider for them and in getting educated on the rules that will apply to their desired investments. Choose your provider wisely and make sure you understand whether they are an IRA Custodian, an IRA Administrator, or an IRA Facilitator. As to getting educated, please check out my Top Ten Most Frequently Asked Self-Directed IRA Questions (and Answers) article to learn the answers and solutions to the most common questions and errors made by investors.  

Mat Sorensen is a guest contributor and is not affiliated to PENSCO Trust Company or its affiliates.  Opinions expressed by Guest Contributors are their own and is not endorsed nor does it represent PENSCO Trust Company or its affiliates.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.

 


[1] The administrative asset review determines if the asset can be held in an IRA. It is not a due diligence review.

 


Retirement Industry Trust Association states 2-5% of IRAs are self-directed and ICI data reflect consistent IRA year over year growth since 2000.