I receive many a calls regarding both self-directed IRAs and 401Ks as to how they are established and how one qualifies for either. Typically, and not surprisingly, many individuals are not aware of both the subtle and unsubtle differences between the two. As I have written many posts about the differences between the two (and they are considerable), this post addresses IRAs (whether self-directed or not) and the role of the IRA custodian. PGI Agency, Inc. is not an IRA custodian, but rather a facilitator for the self-directed IRAs.
You MUST have a custodian.
Simply stated, whether we like it or not, the IRS requires that anyone who has an IRA must have an IRA Custodian for their plan. This was mandated by Congress when IRAs first came to be and the rules have not changed. The IRA Custodian is a bank, trust, financial services company, insurance company or any other company that has received written authorization to serve as an IRA Custodian by the IRS.
Okay, you ask, so what? What does the IRA Custodian actually do? Well, the IRA Custodian is:
1) Responsible for all basic record keeping of your IRA which includes, but may not be limited to, contributions made to the plan, rollovers and transfers made from your account. They keep track of all distributions from that plan that you may take and accounting for any investments you make through your IRA.
2) Your IRA Custodian is also responsible for all IRS reporting for your plan. There are two forms that the Custodian is responsible for each year for your plan. The first is the 1099 form. The 1099 form accounts and reports for any distributions taken from your account. Most people are unaware that when they execute a Rollover from one IRA to another qualified account, that this transaction is considered to be a distribution.
The second form, Form 5498 shows any contributions made to your IRA during that tax year and also reports the Fair Market Value (FMV) of your IRA. This is an annual requirement for your IRA conducted by the Custodian. In order for the Custodian to report the FMV, the client (obviously in the case of a self-directed IRA with checkbook control) must account to the Custodian with an accurate FMV for their IRA account.
When you rollover money into an IRA, it’s considered a contribution to the account and will be reported on your 5498 form. You must complete a rollover within 60 days of receipt of the funds to avoid tax consequences. When you do a rollover, you should receive a 1099 from your previous Custodian/Plan Administrator and a 5498 from your new Custodian. These two forms, in effect, cancel each other out and the net effect is no tax consequences…..it merely reports the transaction.
How does this affect your potential interest with a SD IRA?
Well, if you are considering any IRA (self-directed or not), these stated requirements are in place for ALL IRAs. However, as many of you may already know, the vast majority of all IRA Custodians do not allow or accept non-traditional assets (e.g., real estate). Is it against IRS rules for an IRA to hold such assets…no. It is just that most Custodians do not choose to allow them in the IRAs that they “hold.”
If you are interested in having a SD IRA and desiring full control of your funds so you can invest in non-traditional assets, please keep this post in mind. One of the most important things to remember is that the IRS and its regulations do not differentiate between a “normal” IRA and a SD IRA. There are different rules related to different types of IRAs (e.g., SIMPLE, Traditional, Roth, SEP) but not what these IRAs can invest into.
It is important to note that an IRA Custodian does not dispense tax, legal, financial or investment advice. And, as you have heard me before in these posts, PGI Agency as well does not dispense tax, legal, financial or investment advice. As always, with all such important matters, you should consult your tax or legal professional.