Self Directed IRA Inheritance Custodian / Trustee Requirements

With all this discussion about different types of IRAs and the exciting investment possibilities available with these accounts, I thought an article detailing exactly what requirements an account trustee/custodian must have in order to manage them. These requirements are all held by the Internal Revenue Service (IRS) who also enforces compliance. Basically, to qualify as a trustee, the entity must be a bank or, if not a bank, the entity must be able to prove that:

  • IRA accounts must be maintained separately from employer retirement plans even if held in a single trust as a whole; that is, the assets from these accounts cannot commingle. This is to guard against IRA accounts investing in assets that employer plans are allowed to, but the IRAs are not (life insurance, for example).
  • Roth IRAs and traditional IRAs must be maintained in separate accounts. This is for similar reasons as above, the two types of IRAs have different governing regulations and the only compliance guarantee can come from managing separate accounts for the two types.
  • Accountholder account interest is not forfeitable.
  • Ultimately, the non-bank custodian must receive approval from the IRS. The IRS will seek confirmation that the prospective IRA custodian meets requirements in Section 408 of the IRS Code.

Banks are defined here as traditional banks, insured credit unions, or corporations subject to supervision and examination by state banking officials. Non bank entities must be able to prove as trustees of IRA accounts that they are within compliance of the IRS code. While it sounds like a lot of hoops that the non-bank entity must jump through to get IRS approval, the requirements really are not steep. However, when seeking out a non-bank entity to manage your IRA account definitely seek out their credentials. Firms managing accounts that do not meet IRS requirements could have devastating effects on your IRA account.

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