Do I Need a Custodian for a Self-Directed IRA?

Do I Need a Custodian for a Self-Directed IRA?

A self-directed IRA is a type of individual retirement account directly managed by the account holder and can hold numerous investment options that regular IRAs cannot facilitate, specifically alternative investments like Real Estate. But one question new account holders may ask is if there is a need for a custodian for their self-directed IRA.

You need a custodian for your self-directed IRA. Unlike regular IRAs, this custodian is only responsible for holding and administering IRA assets and reporting to the IRS on your behalf. The account holder decides on what investment to acquire, as permitted by law.

This article will explore who can be a custodian for your self-directed IRA and what assets you can buy with it. We will also briefly discuss the pros and cons of having self-directed IRAs.

Who Can Be a Custodian for Self-Directed IRAs?

Any entity or organization licensed or regulated by the Internal Revenue Service (IRS) or State Charter can act as your self-directed IRA's custodian. This ensures that account owners follow contribution limits, age requirements, and other rules that govern IRAs. This includes, but is not limited to, the following:

  • Banks
  • Trust companies
  • Credit unions
  • Brokerages
  • Mutual fund companies
  • Financial services companies

Roles and Responsibilities of a Custodian for Self-Directed IRAs

The custodian is in charge of assisting you in opening and funding your self-directed IRA; however, they cannot provide advice concerning your investments. You control what assets to acquire for your IRA, so you are responsible for exercising due diligence before making any investment decisions. This is the main difference between traditional custodians like Fidelity and Vanguard, who make money selling you investments and selling advisory services. Self Directed Custodians only act as recordkeepers and administrators, reporting to the IRS on your behalf.

The custodian’s main responsible is reporting the value of your self-directed IRA to the IRS on your behalf. This includes filing appropriate documents such as Form 5498 and Form 1099-R. 

Tips for Choosing a Custodian for Your Self-Directed IRA

Here are some tips to consider when choosing a custodian for your self-directed IRA:

  • The custodian must have a wide range of investment options that you can choose from, including non-traditional investment options such as real estate or privately-held firms.
  • The custodian charges low fees, including maintenance fees and transaction fees.
  • The custodian must be available and knowledgeable to answer your questions about your self-directed IRAs, especially regarding non-traditional investment options.

Can I Be the Custodian of My Own Self-Directed IRA?

You cannot be the custodian of your own self-directed IRA. Only entities licensed and regulated by the IRS can become the custodian of an IRA. You must work with a custodian to manage your self-directed IRA. Bottom line is the IRS doesn’t trust you. They require an institution (the custodian) to report the value of your tax-deferred and tax-free accounts on your behalf.

Difference Between a Custodian and an Administrator

An IRA custodian must meet the requirements of the IRS and is usually overseen by regulators. They are allowed to have custody of assets under the IRA on behalf of the account owner.

On the other hand, an administrator acts as an intermediary between the account owner and an IRA custodian to provide their services. They are responsible for the maintenance of the account and can oversee the processing of the relevant paperwork on behalf of the custodian.

Which Assets Can One Buy With a Self-Directed IRA?

Apart from the traditional assets like stocks, bonds, certificates of deposit, and mutual funds, here are other assets you can buy with a self-directed IRA:

  • Real estate, including real estate investment trusts (REIT)
  • Precious metals, but this is limited to gold, silver, platinum, and palladium
  • Private equities, including limited liability companies and limited partnerships
  • Private lending and promissory notes
  • Tax liens
  • Private securities
  • Cryptocurrencies
  • Foreign currency
  • Commodities
  • Startups

Assets You Cannot Buy With a Self-Directed IRA

While you can virtually invest in anything through your self-directed IRA, there are some assets or investments that an IRA cannot acquire. These include:

  • Collectibles like antiques, artworks, gems, stamps
  • Life insurance
  • Other precious metals apart from gold, silver, platinum, and palladium
  • S Corporations 

Costs of Setting Up a Self-Directed IRA

The cost of setting up a self-directed IRA varies from one custodian to another. Fees range from $250 to $2000 depending on the size of your account. This fee can be deducted from your IRA.

A fee is also charged for every IRA transaction if you intend to diversify your investment portfolio and acquire multiple investments or assets.

Other standard fees that are being charged against a self-directed IRA include:

  • Asset-based fees
  • Administrative fees
  • Asset purchasing fees
  • Asset holding fees

Contribution Limits for a Self-Directed IRA

The IRS sets the amount of contribution one can put to a self-directed IRA. This amount is usually changed annually to consider inflation. For the years 2021 and 2022, the annual contribution limit is $6,000. 

People aged 50 and above can make a “catch-up contribution” to put more money into their IRA. For the years 2021 and 2022, they can add an additional $1,000 to their IRA, so their annual contribution limit is $7,000.

If you exceed the contribution limit, the IRS will impose a penalty, and the excess contribution must be removed. You must withdraw the excess funds and the returns earned from your IRA to avoid the penalty.

Advantages and Disadvantages of Self-Directed IRAs

Every investment and strategy has its pros and cons. Here are some advantages and disadvantages of having self-directed IRAs:


  • You can create a diverse investment portfolio with your self-directed IRA, given the large pool of assets that you can invest in. 
  • With a diversified portfolio, your self-directed IRA can potentially bring higher returns.
  • You are in direct control of your self directed IRA, and you get to decide where to allocate your funds for your IRA.
  • Self-directed IRAs can grow faster, provided you have expertise in the investment arena in which you choose to participate.


  • You may be unable to move your funds quickly as some assets may require extended time before selling.
  • As you can invest in anything you want that is permitted by law, you may be potentially exposed to a wide range of risks. Therefore, you must fully understand the investments you acquire through your self-directed IRA. The custodian or administrator of your IRA cannot provide advice or evaluate your investment options.
  • Fees related to managing your self-directed IRA are more transparent than with traditional IRA custodian, meaning you can easily see the fees you pay, sometimes making them feel more expensive than other IRA’s where you hold stocks and mutual funds, and fees are based on a variety of different asset allocations and asset based fee percentages.
  • The government could slap you with penalties and interests if you acquired prohibited investments using your self-directed IRA.

Final Thoughts

If you plan to set up a self-directed IRA, you must work with a custodian that is licensed and regulated.

Your custodian will be responsible for managing the recordkeeping of your account. They can provide you with the information you need for the investments your account can make, including what you can and cannot acquire through your IRA. But, the custodian cannot make any financial advice or verify the legitimacy of your investments.

Please check out our article about creating a self-directed IRA if you wish to set up your own and want to know more.