The main distinction is that the custodian is responsible for the custody of the assets of a plan, but is not its owner and therefore cannot buy, sell, transfer or move the assets unless the trustees give him explicit instructions to do so. Report a problem with this page. BOL Learning Connect offers more than 200 courses ON DEMAND or on CD ROM, from AML to Reg Z and all topics in between. 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. Although, in some situations, the trustee can also be the custodian in the case of a trust company that holds bearer securities, for example, there is no conflict of interest in others, an external custodian can ensure that there is no conflict and provide added value, such as commercial negotiation. Banks are an option when account owners prefer to have FDIC-insured securities, such as certificates of deposit (CDs) or money market mutual funds, in the IRA. Once the right IRA and investments are chosen, the main factors that will distinguish one custodian from another are investment options, fees, and customer service.
The only advantage of using an investment fund as the custodian of an IRA is that these companies allow account owners to invest in mutual funds or ETFs. Managing IRAs can be complex and frustrating, and there's nothing worse than dealing with poor customer service. Since SDIRAs allow for a variety of investment options, they can provide greater investment diversification than standard IRAs. An approved non-bank trustee or custodian must notify the IRS of any changes in name, address, or any other change that may affect the entity's status as an approved trustee or non-bank custodian.
Unless the account owner prefers a robo-advisor, the IRA specialists at most custodians are experienced professionals and are available to account owners. When choosing between traditional IRAs and SDIRAs, the account owner must be aware of the different financial institutions that are available to act as custodians. However, in financial services, an SDIRA is simply an IRA in which custodians allow the account owner discretionary control over investing in investment products other than traditional stocks, bonds, and mutual funds. Rather, the custodian must minimize the risk of theft or loss, but the custodian has no fiduciary responsibilities to the beneficiaries.
Roth IRAs are retirement accounts in which the owner pays taxes on the money deposited in the account (after-tax contributions) and, therefore, all withdrawals are tax-exempt. Since alternative investments are more cumbersome for custodians, managers and facilitators have become a link between the IRA account holder and the depositary. It's important to note that the IRS only authorizes custodians to hold (or “guard”) the assets in their IRA account. It's important to note that some states don't allow administrators to manage IRA accounts on behalf of the custodian in this way.