A self-directed IRA (SDIRA) can hold a broader range of asset classes than other more conventional retirement accounts, including real estate, private equity, private placements, limited liability companies, notes, and other alternative assets. While the account holder selects the assets held within the IRA, an important part of the account structure happens behind the scenes: custody and administration.
The terms self-directed IRA custodian, self-directed IRA administrator, provider, and facilitator are sometimes used interchangeably, but they can represent different roles. Understanding those distinctions—and what a custodian actually does—can give account owners a clearer picture of how an SDIRA operates.
What Is a Self-Directed IRA Custodian?
A self-directed IRA custodian is the financial institution or trust company responsible for holding IRA assets and performing required administrative functions for the account.
An IRA must be established with a qualified trustee or custodian. Banks and certain other entities can serve in this capacity, while nonbank trustees or custodians must meet IRS requirements and receive approval to act as a trustee or custodian.
Depending on the provider and account, IRA services may include:
- Establishing and maintaining the IRA account
- Holding IRA assets in the name of the IRA
- Processing authorized purchases and sales at the account holder's direction
- Processing contributions, transfers, rollovers, and distributions
- Maintaining account records
- Completing applicable IRS forms and reporting
- Providing account statements
- Obtaining valuations for assets
- Processing certain expenses related to IRA assets
For an SDIRA holding alternative assets, these administrative responsibilities can be particularly important because the assets may require different documentation and recordkeeping than publicly traded stocks, mutual funds, or assets commonly held through a brokerage account.
What Is a Self-Directed IRA Administrator?
A self-directed IRA administrator may provide administrative services, but the term does not necessarily mean the company itself is the IRA's qualified custodian.
Depending on the provider's structure, an administrator or facilitator may coordinate paperwork, transaction processing, or other IRA services while a separate qualified custodian or trust company actually holds the retirement funds or assets.
This is an important distinction when comparing SDIRA providers: Who is serving as the custodian of the retirement account, and which services are being performed by another company?
Why Does the Custodian Matter for Alternative Assets?
Alternative assets can create administrative requirements that aren't typically associated with conventional brokerage assets.
The IRS notes that IRA trustees are permitted to place additional restrictions on the assets they will hold. For example, IRA rules do not prohibit real estate, but a trustee is not required to offer real estate as an option.
That means SDIRA custodians can differ in the types of investments and alternative assets their platforms are equipped to administer.
Depending on the provider, available asset classes may include:
Before establishing an account, account holders can verify whether a particular asset can be administered by their chosen SDIRA custodian.
What Role Does the Custodian Play in IRS Reporting and Recordkeeping?
Custodians perform important recordkeeping and reporting functions associated with IRA accounts.
For example, IRA trustees, custodians, and issuers use Form 5498 to report certain IRA information to the IRS. When an IRA holds certain specified assets, additional asset information must also be reported. IRS reporting categories include real estate, certain LLC interests, non-publicly traded stock, certain debt obligations, and other assets without a readily available fair market value.
A custodian's administrative role can therefore include maintaining records associated with:
- Contributions
- Rollovers and transfers
- Distributions
- Year-end account values
- Alternative asset information
- Required IRS forms
For SDIRA owners, this administrative infrastructure is one of the fundamental differences between personally owning an asset and holding that asset within a tax-advantaged retirement account.
Does a Self-Directed IRA Custodian Select Assets for the Account?
No. With a self-directed IRA, the account owner directs the activity within the account.
The “self-directed” portion of an SDIRA is an important distinction. The Custodian does not choose investments or provide investment advice. While the account owner directs eligible transactions, Mainstar performs the custody, processing, recordkeeping and reporting functions with the IRA.
The custodian's role centers on custody and administration rather than selecting assets for the retirement portfolio.
Account holders may work separately with a financial advisor, tax professional, or legal professional when appropriate for their circumstances.
Are All SDIRA Fee Structures the Same?
No. Fee structures can vary considerably among self-directed IRA providers.
Depending on the custodian or administrator, fees may be based on factors such as:
- Number or type of assets held
- Account value
- Transaction activity
- Asset purchases or sales
- Distributions
- Annual account administration
- Special processing requirements
Account holders can review a provider's complete fee schedule upfront to understand applicable account and transaction fees.
It's also useful to distinguish custodial fees from expenses charged by asset sponsors, property managers, LLC providers, or other third parties associated with particular IRA assets.
What Should You Know When Comparing SDIRA Providers?
Understanding exactly what services a provider performs is an important starting point when comparing self-directed IRA companies.
Questions to explore may include:
- Is the company serving as the actual custodian or as an administrator or facilitator?
- What types of investments can the custodian hold?
- Does the provider have experience administering alternative assets?
- What documentation is required for new assets?
- How are transactions processed?
- What recordkeeping and reporting services are included?
- What are the applicable fee structures and transaction fees?
- What educational resources, FAQs, or webinars are available?
- How can account holders access their account information and forms?
The answers can make it easier to understand how each provider's services, processes, and capabilities differ.
What Makes Mainstar Trust Different?
Mainstar Trust is a self-directed IRA custodian with experience administering retirement accounts that hold a broad range of traditional and alternative assets.
Mainstar Trust offers several IRA account types, including Traditional, Roth, SEP, Rollover, and Inherited IRAs. For new SDIRAs, the process generally includes opening the account, funding it through an eligible contribution, transfer, or rollover, verifying that the desired asset can be held on the Mainstar platform, and submitting the appropriate transaction documents.
Mainstar Trust also uses an activity-based fee structure rather than charging a market-value fee, so account fees do not increase simply because the account's value grows.
Ready to Open a Self-Directed IRA?
Choosing a custodian is an important part of establishing and maintaining a self-directed retirement account. From holding alternative assets to processing transactions and maintaining required records, your custodian plays an essential administrative role throughout the life of your SDIRA.
When you're ready to set up your self-directed IRA, contact the Mainstar Trust team to learn more about our account options, alternative asset capabilities, fee structure, and account-opening process.