An IRA trustee, also called a custodian, is the institution that manages your IRA. By law, every qualified retirement plan must have a custodian or trustee. . 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. Trustees have a responsibility to maintain the plan in compliance with regulations issued by the Internal Revenue Service (IRS).
It should be noted that the same result would occur with a trust as a beneficiary for the spouse; in other words, this is not a warning of the particular fiduciary IRA, but rather of using any type of trust structure for the inherited IRA. Since fiat IRAs are “trusts” functionally managed by a corporate trustee, the cost of a trust IRA is the cost of having a corporate trustee from a professionally managed trust. However, the caveat is that a fiat IRA doesn't really offer any benefits that can't already be achieved with a (independent) trust as a beneficiary. In addition, the use of a fiduciary IRA greatly simplifies filing taxes for beneficiaries, at least compared to the alternative of trusting as a beneficiary, since the beneficiary of the trust IRA simply receives the standard 1099-R form that reports on distributions as they occur.
In addition, the trust IRA can stipulate both the initial beneficiary of the retirement account and the successor beneficiaries, allowing the original owner of the IRA to ensure that the remaining value of the account goes where they want (e.g. The trustee may be empowered to buy and sell a wide range of investments within pre-established limits or at his own discretion. It should also be noted that a fiduciary IRA can also create some minor, but not trivial, tax complications when determining the period after the death of an inherited IRA. To function as a trustee, an entity must have an IRS license and maintain the standards set by that agency.
This ensures that the trustee independently determines which financial advisors or investment managers are associated with the account and creates a better system of checks and balances (to the extent that the trustee is now separated from the investment manager and can independently fire an underperforming manager). However, the number of fiduciary IRA providers has been increasing in recent years, in part because the fiduciary IRA is very attractive from the perspective of the IRA provider, since, as a trustee of the IRA itself, it is very difficult for future beneficiaries to fire the trustee or transfer the account to another provider, allowing the trust IRA provider to be more likely to hold the assets than an IRA provider with traditional custody. In contrast, with a fiduciary IRA, the financial institution itself acts as a trustee and simply receives instructions from the IRA owner on how the account should be managed. Ultimately, a fiat IRA is just another form of structuring using a trust as the beneficiary of an IRA: automatically transferring annual RMDs, but restricting the beneficiary's access to the rest of the account.
Consequently, the fiat IRA providers available today are a diverse mix of traditional private banks and trust companies for a high net worth clientele (e.g. When opening a new individual retirement account, it's a good idea to research the IRA trustee who will participate in the account. .