How to Choose a Self-Directed IRA Custodian: 5 Factors to Consider
Choosing a self-directed IRA custodian is one of the most important decisions you will make when establishing a self-directed retirement account. The custodian establishes and administers the IRA, maintains custody and records of the IRA’s assets, processes transactions at the account owner’s direction, and completes required IRS reporting.
You are also placing your hard-earned retirement dollars under that company’s custody. Before opening an account or transferring retirement funds, you should understand who the provider is, how it is regulated, what experience its staff has, what resources it offers, and how its fees will affect your account over time.
There are five primary factors to consider when assessing which self-directed IRA custodian to work with.
1. Licensing and Regulatory Status
Licensing should be the first issue you examine. Before comparing service, technology, or fees, determine whether the company is the actual licensed custodian or merely an administrator acting between you and another institution.
There are two categories of companies who may serve as an IRA custodian. First are banks, credit unions, and trust companies who are automatically allowed to serve as IRA custodians under IRC § 408(a)(2). For example, Directed IRA by Directed Trust Company is a licensed trust company and can serve as an IRA custodian. And second, a company that is not a bank, credit union, or trust company, may apply to the IRS to become an approved nonbank trustee or custodian under Treasury Regulation § 1.408-2(e). These non-bank entities are almost entirely broker-dealers who sell publicly traded investments to their customers’ IRA accounts. The IRS maintains a public list of approved nonbank or trust company custodians, allowing investors to verify whether a provider who is not a bank or trust company (e.g. a broker dealer) has received IRS approval. On this list you will note traditional brokerage firms such as Charles Schwab and Merrill Lynch. Note that banks and trust companies are already automatically allowed to serve as a custodian and as a result are not on the list.
Traditional brokerage firms such as Charles Schwab and Merrill Lynch offer IRAs and these firms generally limit their customer’s IRA investments to publicly traded securities and other investments offered through their platforms.
Self-directed IRA custodians do not sell or recommend investments and as a result to not offer investments. Their role is to custody and administer the account while allowing the IRA owner to direct investments into whatever legal asset the IRA owner selects such as real estate, private funds, private companies, notes, precious metals, crypto, and other assets permitted under the law.
As a result, properly licensed self-directed IRA custodians operate as banks or trust companies.
Licensed Custodian Versus Third-Party Administrator
Not every company marketing self-directed IRA services is the actual custodian.
Some providers operate as third-party administrators, commonly referred to as TPAs. A third-party administrator may process paperwork, communicate with account owners, and perform administrative functions, but another bank, trust company, or approved nonbank custodian legally holds the IRA.
There is nothing inherently improper about using a third-party administrator, but it is not the best model as these entities are not licensed, regulated, or audited. You should know which company is the actual custodian, which company controls cash movement, and which entity is examined by a banking, SEC, or trust regulator.
Ask the following questions:
- What is the legal name of the IRA custodian?
- Is the company a bank, credit union, trust company, or IRS-approved nonbank custodian?
- Which state or federal agency regulates the custodian?
- Is the company you communicate with the actual custodian or a third-party administrator?
- Who has control over uninvested cash? And is that company audited?
- Who completes IRS required reporting for your IRA such as Form 5498 and Form 1099-R reporting?
- Who is responsible for safeguarding and reconciling account cash and assets?
The terms “bank” and “trust company” are commonly restricted under state law and may be used only by appropriately chartered or authorized entities. So if a company has the name bank or trust company in its name it is likely properly licensed. However, investors should still verify the company’s status directly with its state or federal regulator rather than relying on its name alone.
The Importance of Regulatory Oversight
Properly chartered banks and trust companies are subject to regulatory examinations, capital requirements, internal control standards, and financial reporting requirements imposed by their chartering authority. The exact examination and audit requirements depend on the company’s charter and regulator.
These requirements do not eliminate all risk. They do, however, create a level of independent oversight that may not exist when an unregulated administrator controls account activity.
The American Pension Services case illustrates why investors should understand who controls their retirement funds.
American Pension Services operated as a third-party administrator, while a separate bank served as custodian. American Pension Services commingled customer cash in master trust accounts, and its owner used forged documents and signatures to make unauthorized investments. The SEC found that more than $22 million of investor funds was misappropriated and that American Pension Services, a third party administrator for self-directed IRAs, inflated account statements and concealed the losses.
Third party administrator custodians pose more risk to self-directed IRA investors because they do not have licensing requirements, audits, or examinations. New self-directed IRA investors should therefore understand the licensing and audit structure of the self-directed IRA custodian they choose and the custodians who are licensed, regulated, and audited, every year are the ones who will pose less risk.
A provider should be able to clearly explain:
- Who the custodian is
- Who the regulator is
- Where cash is held
- Who has authority to move funds
- What independent examinations and audits apply
If a provider cannot answer those questions directly, that should be a concern.
2. Expertise and Credentials of the Staff
The second factor is the expertise of the people administering your account.
Self-directed IRAs involve investment assets and transactions that are different from standard brokerage investments. The custodian’s staff may need to process:
- Real estate purchases and sales
- Private company investments
- LLC and limited partnership interests
- Promissory notes and private loans
- Private funds and syndications
- Precious metals
- Cryptocurrency
- IRA/LLC structures
- Fair market valuations
- Required minimum distributions involving illiquid assets
- Transfers and rollovers involving non-publicly traded assets
The custodian does not provide investment, legal, or tax advice. However, its employees should understand the documents, titling requirements, reporting responsibilities, and operational procedures involved in administering these assets.
Look for staff members and company leaders with relevant professional credentials and industry experience, including:
- Attorneys
- Certified Public Accountants
- Certified IRA Services Professionals, credential from American Bankers Association
- Self-Directed Industry Professionals (SDIP Certification), credential from the Retirement Industry Trust Association
- Professionals with trust, banking, custody, or retirement-plan experience
You should also determine whether the custodian participates in industry organizations that provide continuing education, conferences, compliance training, and updates on regulatory developments.
Credentials alone do not guarantee good service. They do demonstrate that the company has invested in building internal expertise.
Ask how long the company has administered self-directed accounts and how often it handles the type of investment you intend to make. A custodian experienced with precious metals may not necessarily have the same depth of experience with real estate, venture capital, private lending, mineral rights, or digital assets.
3. Independent Recognition and Customer Feedback
The third factor is independent recognition and customer feedback.
Every company will describe itself favorably on its own website. Independent reviews, rankings, awards, and customer feedback can provide another perspective.
Consider:
- Google reviews
- Independent editorial reviews
- Industry awards
- Growth and business recognition
- Customer complaints and how the company responds
- Referrals from attorneys, CPAs, financial advisors, asset sponsors, and other professionals
Do not rely on a single review or award. Look for patterns.
For example, Directed IRA by Directed Trust Company has been recognized by Inc. Magazine as an Inc. 5000 company for four consecutive years. Inc.’s company profile identifies Directed IRA as a financial-services company that provides self-directed retirement accounts for non-publicly traded assets.
Third-party recognition does not replace due diligence. It can, however, help demonstrate that a company has an established operating history and has been evaluated outside of its own marketing materials.
Customer reviews can also reveal practical issues that are difficult to identify from a fee schedule or service agreement.
Pay attention to repeated comments involving:
- Processing times
- Responsiveness
- Employee knowledge
- Online account access
- Transaction communication
- Transfer and rollover assistance
- Problem resolution
- Unexpected fees
A large number of reviews is generally more useful than a small number of perfect ratings. Read both positive and negative reviews and determine whether the provider’s responses are specific and professional.
Rankings, ratings, and review counts can change, so investors should confirm current information directly with the applicable third-party source.
4. Education, Service, and Technology Resources
A self-directed IRA custodian does not select investments or perform due diligence for you. You are responsible for identifying and evaluating your own investments.
That makes education and account resources especially important.
A strong self-directed IRA provider should help account owners understand:
- How a self-directed IRA works
- How to transfer or roll over retirement funds
- How investments must be titled
- How income and expenses must flow through the account
- What forms are required to make an investment
- What the custodian does and does not review
- How annual valuations are completed
- How distributions are processed
- How prohibited transactions may arise
- When UBIT or UDFI may apply
Educational resources may include:
- Webinars
- Live events
- Books and written guides
- Articles
- Videos
- Podcasts
- Account-owner training
- Frequently asked questions
- Investment checklists
- Access to knowledgeable service representatives
Technology also matters.
The provider should offer a secure and functional online platform that allows you to:
- View cash and assets
- Upload documents
- Submit investment directions
- Track pending transactions
- Review account statements
- Update valuations
- Request distributions
- Pay account fees
- Communicate securely with the custodian
Directed IRA provides educational articles, webinars, podcasts, guides, calculators, and account resources covering self-directed IRA investments and rules. Directed IRA’s CEO Mat Sorensen is also the author of The Self-Directed IRA Handbook, which is in its third edition. The Handbook is the most widely used book in the self-directed IRA industry and is used by government regulators and by the national industry association for the self-directed IRA professional credential (SDIP).
The quantity of educational content is not the only consideration. Review the quality and accuracy of the material. It should explain the rules clearly without suggesting that every investment is permitted or that the custodian has approved the merits of an investment.
5. Pricing and Fees
The fifth factor is pricing.
Self-directed IRA custodians may charge fees based on:
- Account value
- Number of assets
- Number of transactions
- Account type
- Wire transfers
- Check processing
- Asset purchases or sales
- Precious-metals storage
- Cryptocurrency trading
- Distributions
- Account termination
The first question to ask is whether the company charges a flat annual fee or a fee based on the value of your account.
Assets Under Custody Pricing
Some custodians charge annual fees based on account value, sometimes referred to as assets under custody or AUC pricing. Under this structure, your fee increases as the value of your retirement account increases.
That means the custodian may charge more as your investment appreciates, even if the administrative work required for the account has not materially changed.
Flat-Fee Pricing
Some custodians, including Directed IRA, use a flat annual pricing model. For accounts valued below $2 million, the annual fee remains the same regardless of account value. Accounts valued at $2 million or more are subject to additional pricing tiers.
Directed IRA currently charges:
- $50 one-time account establishment fee
- $495 annual self-directed IRA account fee
- $50 one-time asset-processing fee
The annual fee includes up to three alternative asset holdings. For accounts valued below $2 million, the annual fee does not increase based on account value.
Example: Flat Fee Versus Account-Value Pricing
The following table illustrates how Directed IRA’s flat annual fee compares to a tiered account-value pricing model commonly used by some self-directed IRA custodians. The purpose is to demonstrate how different fee structures can affect annual costs as retirement account values grow.
Account value | Directed IRA annual account fee | Example tiered annual fee | Annual difference |
$100,000 | $495 | $750 | $255 |
$250,000 | $495 | $1,000 | $505 |
$500,000 | $495 | $1,500 | $1,005 |
$750,000 | $495 | $2,000 | $1,505 |
$1,000,000 | $495 | $2,500 | $2,005 |
In this example, a $500,000 account would incur a $1,500 annual fee under the account-value pricing model, compared with Directed IRA’s $495 annual account fee, resulting in a difference of $1,005 per year.
Over ten years, assuming the fee structures remained unchanged, that difference would total $10,050. This example does not include setup fees, asset-processing charges, transaction fees, special-service fees, storage fees, trading costs, or account-termination charges. Those fees vary by provider and should be reviewed separately.
Fee schedules may change over time, so always review a provider’s current fee schedule before opening or transferring an account.
Compare Fees on an Apples-to-Apples Basis
A lower annual fee does not necessarily mean a lower total cost.
Before choosing a custodian, determine whether the quoted fee includes:
- All assets or only one asset
- Transactions during the year
- Wires and checks
- Annual valuation processing
- Online bill payment
- Roth conversion processing
- Required minimum distributions
- Tax-form reporting
- Account termination
- In-kind asset distributions
You should also understand whether the custodian charges separately for each LLC, property, note, private fund, or private company interest. Many IRA custodians will charge an annual fee per asset.
The most useful comparison is the estimated total annual cost based on your account size, number of investments, and anticipated transaction activity.
Questions to Ask a Self-Directed IRA Custodian
Before opening an account, ask the provider:
Category | Question |
Regulation | Which state or federal agency regulates you as custodian? |
Structure | Are you the actual custodian or a third-party administrator? |
Cash | Where is uninvested cash held, and who can move it or has access to it? Does another company have access to it? |
Audits | What independent audits or regulatory examinations apply? |
Experience | How long have you administered self-directed IRAs? |
Asset expertise | How often do you process the type of investment I intend to make? |
Credentials | What IRA, trust, legal, accounting, or custody credentials does your staff hold? |
Technology | Can I submit and track investments through an online portal? |
Education | What training and educational resources are available? |
Pricing | Is the annual fee flat, asset-based, based on account value, or a combination? |
Additional fees | What fees apply to wires, purchases, sales, distributions, and account termination? |
Service | Who do I contact when I have a pending transaction or account question? |
The Custodian Does Not Approve the Investment
Regardless of which custodian you choose, it is important to understand the custodian’s role.
A self-directed IRA custodian does not:
- Recommend investments
- Determine whether an investment is suitable
- Investigate the sponsor or issuer
- Verify financial projections
- Guarantee returns
- Determine whether the investment is legitimate
- Provide legal, tax, or investment advice
The custodian administers the IRA and processes investments at the account owner’s direction. The account owner remains responsible for conducting due diligence and consulting with qualified legal, tax, and financial professionals.
Do not assume that an investment is safe or approved merely because a custodian processes your request.
Key Takeaways
There are five factors you should evaluate when choosing a self-directed IRA custodian:
- Licensing and regulatory status
- Expertise and credentials
- Independent recognition and customer feedback
- Education, service, and technology resources
- Pricing and fees
Start with licensing. Determine who the actual custodian is, who regulates the company, where account cash is held, and who has authority to move it.
Then evaluate the provider’s experience, staff credentials, reputation, educational resources, technology, service model, and complete fee schedule.
The custodian you choose will be responsible for administering and reporting assets that may remain in your retirement account for decades. Take the time to understand the company and its custody structure before transferring your retirement funds.
At Directed IRA by Directed Trust Company, we’ve built our company around these same principles. As a licensed trust company, we focus exclusively on self-directed retirement accounts, provide extensive educational resources, employ experienced professionals, invest in technology that simplifies alternative asset investing, and offer straightforward flat-fee pricing. Whether you’re investing in real estate, private funds, precious metals, venture and start-ups, cryptocurrency, or other alternative assets, our goal is to provide the custody, service, and education you need to invest with confidence.
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Directed IRA is a trade name of Directed Trust Company, a licensed trust company specializing in self-directed retirement accounts. Directed IRA provides flat-fee self-directed IRA custody, account technology, and educational resources for investors using retirement funds to invest in real estate, private funds, private lending, private companies, cryptocurrency, precious metals, and other alternative assets.
This article is for educational purposes only and does not constitute legal, tax, investment, or financial advice. Directed Trust Company does not sell investments, endorse investment sponsors, or perform due diligence on investments selected by account owners.
