The Internal Revenue Service viz Section 408 (a)(2) mandates the role of a trustee or a custodian in administering the trust fund of an Individual Retirement Account.
A trustee/custodian is essential for the management of a self-directed IRA, as the account owners are not allowed to take personal possession of the IRA assets at any time.
Custodian vs Trustee
The Internal Revenue Code defines the role of a trustee as:
“The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.”
As per subsection (n), the term “bank” means—
- any bank
- an insured credit union or
- a corporation
However, in actual practice, the term ‘custodian’ is used in place of ‘trustee’. The role of a custodian and a trustee overlaps to a large extent but there is a minor difference.
Both custodian and trustee are IRS-approved financial institutions to hold the IRA assets on behalf of account owners. Both are required by law to maintain records of the transactions in the accounts, send reports regarding the accounts to both account owners as well as the IRS.
The distinction between a custodian and trustee is in the decision-making powers regarding the investment of IRA funds. While a trustee enjoys the authority to make investment decisions on behalf of the account owner, a custodian doesn’t.
As a trustee is authorized to make buying and selling decisions as stipulated by the trust agreement, they are held to a fiduciary standard, the highest standard in the financial industry for good faith and fair administering. A trustee is expected to make decisions in the best interest of the IRA owner.
Custodians are not considered as fiduciaries as they are not required to offer investment advice or make investment decisions regarding the IRA fund. They are merely expected to carry out the instructions given by IRA owners. The responsibility for due diligence rests with the account owner concerning all transactions in the account.
What is a Gold IRA?
A Gold IRA is a Precious Metals IRA specifically meant for investing in physical gold using funds from a tax-deferred retirement account. It is typically a self-directed IRA unlike the conventional IRAs and other retirement plans such as 401 k. This means the investors are allowed more freedom in investment choices.
Conventional IRAs and retirement plans are only allowed to invest in paper assets. They are not equipped for investment in the physical form of precious metals like gold. Hence the need for a Gold IRA, which is designed specifically for those who want to take advantage of the modern ‘Gold Rush’ without losing the tax advantage enjoyed by retirement accounts.
The stringent rules governing the functioning of a Precious Metals IRA necessitate the involvement of a custodian, gold dealer, and depository for safekeeping of the IRA assets. The IRS rules demand a coordinated operation of all the three players of a Gold IRA to ensure that the gold bought with the IRA funds does not come into the physical possession of the account owner and is transported and stored in the depository directly from the gold dealer.
Role of a Gold IRA custodian
A custodian plays a central role in the functioning of a Gold IRA. As part of carrying out the instructions of account owners regarding the purchase of gold bullion, a custodian is required to see to it that the payment to the gold dealer goes through smoothly and the purchased bullion products reach the chosen depositary safely and are stored securely.
A custodian is required to handle and keep records of all transactions in the account, send account statements every month/year to the account owner, and file Form 5498 for each Gold IRA with the IRS. Additionally, Form 1099-R has to be filed if the custodian has made a distribution of more than $10 to the account holder.
The custodian of a Gold IRA has the responsibility to pay all charges related to the account including depository fees and insurance amount.
Gold IRA custodian fee structure
The fees charged by custodians vary from company to company. While some charge flat-rate for their services, others have variable fees that are based on the value of the funds and assets in the account. As a custodian is responsible for paying all charges in connection with a Gold IRA, such as depository fees and insurance premiums, a custodian fee covers them all.
When setting up a Gold IRA with a custodian, you may have to pay the following fees:
- An account setup fee which is a one-time payment
- An annual maintenance fee, which can be flat-rate or variable
- Depository fees based on the depository chosen
- Insurance premium
- Monthly/annual statement fee
- Transaction charges
The fees listed above may be charged separately or clubbed together.
The IRS mandates that the IRA assets are insured against loss or theft of the physical assets during transportation to the depository and when stored at the depository. It is not insurance against market losses due to a crash in the price of gold.
A Checkbook IRA is considered a way to bypass the role of a custodian, thereby saving money on their fees. In this, the account owner is the custodian of the own account. However, not every individual can open a Checkbook IRA.
The Internal Revenue Service rules state that if an individual owns a Limited Liability Company (LLC) and the LLC has a bank checking account, then the individual can set up a Gold IRA in the name of the LLC. This means that as the owner of the LLC, the Individual Retirement Account holder is also the trustee or the custodian of the Gold IRA.
Before using this provision to open a Checkbook IRA, you need to seek approval from the IRS, demonstrating your fiduciary skills and experience to handle your own retirement account. Other requirements include yearly audits by a certified public accountant, a running retainer agreement with a corporate legal counsel, and a minimum net worth of $250,000.
As they say, with great power with great responsibilities. The Checkbook IRA allows individuals to eliminate the need for a custodian and related fees. However, as custodian of the IRA, you have to comply with all laws as laid down for the functioning of a Gold IRA by the IRS in IRC Section 408. This includes adhering to rules concerning permitted asset classification and prohibited transactions.
In addition to this, as custodian of an own Gold IRA, you need to file Form 5498 and Form 1099-R with the IRS.
Though a Checkbook IRA may seem tempting to avoid some of the expenses related to a Gold IRA, it is easy to make a mistake and end up with heavy penalties and taxes. This will ultimately negate all the monetary advantages that were gained with the IRA in the first place.
Most experts warn individuals against taking the Checkbook IRA route. Even if you are confident of your knowledge of the laws and skills at handling the ensuing legal requirements, experts advise investors to proceed with caution, especially when writing checks using a Checkbook IRA.
Lucrative as it is, gold can have a blinding effect on investors. Knowing this well, there are many deceptive elements in the field, trying to lure unsuspecting investors with enticing deals and false promises. Unfortunately, this includes some of the IRS-approved custodians.
Investors need to have basic knowledge of the bullion market and familiar with the operations of a Gold IRA so that they can avoid falling prey to such scammers.
Here are some of the common scams prevalent in the Gold IRA scene.
Misrepresenting paper investments in gold for physical gold
In a Gold IRA, account owners most often do not get to see the gold bullion they own, though they are allowed to visit the depository. Taking advantage of this, there are some custodians who trick investors into thinking that they are investing in physical gold, but in reality, it would be gold stocks or gold ETFs.
Though this amounts to cheating, it is hard to prove as long as you have signed the documents. Checking the credentials and reputation of the custodian is the first step to avoid this. And, reading and understanding documents before signing also helps.
Denying permission to access your IRA assets
The IRS has allowed retirement account holders access to their physical assets stored in depositories. However, some custodians deny investors this right by including it as a clause in the agreement. You may not even be aware of this until you want to see your assets in the depository. Once you have signed a document relinquishing your right to visit, not much can be done about it.
Again, reading the fine print in the document before signing it helps in avoiding such scams.
At times custodians deny access even without such documents. To make sure that your right to access is protected, insist on documentation that explicitly gives you access.
Promising quick profits
Some custodians to get hold of your retirement account, make false promises of assured high returns or quick profits for your investments. Do understand that there is no such thing as assured returns or quick profits in the bullion market. The price of gold may go up or down and nobody can predict which way it will go.
It is advisable to stay away from custodians who make such tall claims.
9 Tips for choosing Gold IRA companies/custodians
Finding the right custodian for your Gold IRA is not a simple and easy task. It is something that requires patience, time, and research. Transparency, track record, flexibility, qualifications, administration fees, and storage choices offered are the main aspects to consider in a custodian.
Here is a list of vital points to check when choosing a Gold IRA custodian.
#1 Ensure the chosen custodian is IRS-approved and holds a valid license
While making it mandatory for a Gold IRA to be managed by a trustee/custodian, the IRS has spelled it out in detail who qualifies for this. The IRC Section 408 has limited the eligibility criterion for a custodian. This includes financial institutions such as banks, credit unions, or any other entity recognized by the IRS.
Those who satisfy these criteria need to get consent from the IRS and should possess a license to function as a custodian for a Gold IRA. To make it transparent and easier for investors, the IRS has published a list of approved and licensed Gold IRA custodians.
Before finalizing the custodian for setting up a Gold IRA, remember to check this list and ensure that the chosen custodian is featured in it.
#2 Ascertain that the chosen custodian offers the investment choices you want
The IRS has allowed an array of investment choices in a Gold IRA. In addition to physical gold bullion and other precious metals bullion, the investment options available include stocks, bonds, mutual funds, and ETFs. However, many custodians do not offer all the investment choices allowed by the IRS. Many have only limited choices available for investors.
Ensure that the custodian of your choice has all the investment options you would like for the diversification of your retirement portfolio.
#3 Understand the fee structure of the custodian
As the services rendered by custodians are multipronged, the fee structure is anything but simple. It is rare to find an all-encompassing flat-rate fee from a custodian, though this is advantageous from an investor’s point of view. While some include depository fees, others charge additional fees for each service provided such as monthly/annual statements to investors.
Compare the fee structure of all shortlisted custodians and ensure that you are getting a fair deal.
#4 Ascertain the choice of depository services offered are satisfactory
Most top-end custodians offer a choice of depositories for the safekeeping of assets in your retirement account. However, if you are not satisfied with the security, fees, location, or any of the other aspects of the depositories available, you may choose one, provided the custodian is agreeable to the arrangement.
Choosing a depository by yourself is a tricky proposition as its trustworthiness is important for the safe storage of your IRA assets. Once you have vetted the custodian, it is safer to go with their choice of the depository.
Cost-effectiveness is another factor to consider. When approached through a custodian, you would probably get a better deal.
Another way to resolve this is to choose another custodian who offers depository services to your satisfaction.
#5 Check the custodian’s track record
Many companies make tall claims in their advertisements that may not hold up under scrutiny. By checking the veracity of their claims about the experience, investment choices, customer satisfaction, and such, it is possible to get an idea of their honesty and integrity. This will give you a fair idea of what kind of service you can expect from the custodian in the future.
A custodian may claim to have more years of experience to hike up the fees, as custodian fees are directly linked to experience and track record.
With patience and perseverance, it is possible to check the claims made by custodians. It will help in saving you from difficult situations later on.
#6 Confirm that the customer support provided is exemplary
This is an important point that cannot be compromised. After opening an IRA and finding out by your own experience that the customer support provided by the custodian is anything but desirable is sad and totally avoidable. This may result in mental agony or at worst, financial loss.
Changing the custodian for an IRA is both time-consuming and involves lots of effort. Taking precautions by doing a thorough background check can help you avoid lots of grief. It is fairly easy to check the feedback from former and existing customers online or offline. Rating agencies and business directories such as Better Business Bureau are the ideal places to search for customer reviews.
#7 Check out the feedback from existing customers personally
Contact a few customers for general feedback as well as an investment-related assessment about the custodian. Even though a custodian is not expected to offer investment advice and is there just to implement your directions, it makes a difference how your instructions for investment are carried out. Some custodians even chip in with a bit of friendly investment advice.
Look out for custodians who are genuinely interested in providing help to their customers and aren’t in business just to make money for themselves.
#8 Find out the turnaround time for transactions and customer requests
Time is money. This is more so in the case of a Gold IRA. Delay in carrying out transactions like fund transfer may result in monetary loss, as the price of gold is volatile. Again, delaying disbursement requests can be harrowing in addition to financial loss.
Check with existing customers and ascertain the reputation of the custodian regarding this.
#9 Choose a custodian offering FDIC insurance
Though most IRS-approved Gold IRA custodians also satisfy the requirements for an FDIC insurance for the funds in the retirement account, some financial organizations, though licensed to be Gold IRA custodians, do not qualify for this protection. FDIC is a government-run agency that offers protection against losses if a financial institution collapses.
As an investor, when you have the option to choose a custodian offering FDIC insurance, there is no reason to forgo that advantage.
The Best Gold IRA companies/custodians
Choosing the right custodian for your Gold IRA is important for rewarding and stress-free retirement years. From coordinating your transactions, dealing with the multitude of paperwork, and handling the mandatory IRS reports, to ensuring safe storage of your IRA assets in the depository of your choice, a good custodian can make a huge difference. This means you should invest in a good deal of research and thinking into the selection of a custodian for your self-directed IRA.
Finding a custodian can be approached from two angles. Directly find a custodian by checking the credentials of some online and offline or through the gold dealer you have already chosen for buying the bullion. Both work fine as long as you do the homework.
Before you choose a custodian for your Precious Metals IRA, confirm with your gold dealer that they can work together. Or if you are choosing a gold dealer after opening an IRA, make sure that they can collaborate with each other.
Here is a list of the best Gold IRA companies.
Phone: 855- 465-3472
In business for more than a decade with thousands of satisfied customers, the Goldco group specializes in precious metals (gold and silver) and other alternative investments that are not available in regular retirement plans.
- Rated ‘A+’ by BBB and ‘AAA’ by BCA
- Reasonable fees
- Offers a safe and modern storage facility
- Professional and personalized customer service
Opening a Gold IRA with the Goldco group requires a minimum investment of $25,000. The annual maintenance fee is $175 for investments under $100,000 and $225 for investments of $100,000 or above. The storage fee depends on the depository chosen.
Phone: 800- 355-2116
Birch Gold Group is one of the leading dealers in physical precious metals since 2003. Setting high standards for transparency, efficiency, ethics, and customer satisfaction, the Birch Gold Group offers the full spectrum of precious metals. As an IRS-approved IRA custodian, the group can handle all custodial and ensuing administrative responsibilities with ease.
- Rated ‘A+’ by BBB and ‘AAA’ by BCA
- Honest and straightforward approach
- Choice of two depositories
- Glowing customer reviews
The Birch Gold Group has set the minimum investment at a modest $10,000. The group charges a flat rate of $90 as a setup fee and varying annual maintenance fee. The depository fee is in the range of $75-$100 depending on the depository.
In business for more than 20 years, the Oxford Gold Group is a trusted name in the field. The group has a complete range of precious metals in addition to other alternative investment choices. The Oxford Gold Group specializes in helping investors by tailoring investment strategies to meet their retirement goals.
- Rated ‘A+’ by BBB and ‘AA’ by BCA
- Personalized customer service
- Choice of multiple insured depositories
- Depository fee waiver for the first 5 years for larger accounts
The Oxford Gold Group has a minimum investment requirement of $7,500 per purchase. The annual maintenance fee is a fixed $175 for accounts below $100,000. The storage fee is $175-$225 depending on the depository. The group offers a rebate for up to 5 years.
The American Hartford Gold is a family-owned company offering IRA investments in gold, silver, and platinum. The Buyback Commitment offered by the company comes with no liquidation fees and a simple 3-step liquidation process.
- Rated ‘A+’ by BBB and ‘AA’ by BCA
- No shipping fees
- Fast and insured shipping
- Offers a generous buyback plan
- High customer ratings
The American Hartford Gold doesn’t charge setup fees or transfer fees for a rollover from other retirement accounts. There are no minimum investment requirements or fees for shipping IRA assets, including insurance and tracking. The depository fee depends on the value of storage. However, the website doesn’t provide information about the annual maintenance fee.
The simple answer is that the IRS mandates a custodian for all IRAs.
And here is the long answer. Even if you are knowledgeable about the bullion market and is confident of handling the paperwork, having a custodian is beneficial on many counts.
- Time is crucial when buying and selling in the bullion market. With their experience, custodians can handle the transaction in the least possible time.
- There is a lot of administrative work associated with a Gold IRA. Such as reports to the IRS, handling money transfers, and arranging the distribution requested. Familiarity with the processes helps in quick and error-free transactions.
- Safe storage of IRA assets is vital. Custodians typically maintain good relationships with select depositories for the advantage of all concerned. Filing of relevant documents on time is carried out by custodians with ease.
You may want to read about Home Storage Gold IRA
Financial institutions handling regular IRAs and conventional retirement plans such as 401 k charge nominal or even no fees for their services. Their profit comes from investment products such as stocks and mutual funds they sell. Even the unutilized funds in an account are lent out by banks to make money.
In the case of a Gold IRA custodian, none of the above works. A custodian cannot make a profit from the funds or assets in a Gold IRA. This means the custodians have to charge administrative fees for the services rendered to stay in business. Additionally, as a Gold IRA entails safe storage of assets, a storage fee and insurance premium are often included in the custodian fees.
All the fees charged by a custodian at the time of opening a Gold IRA and later on may be paid from the IRA assets or directly using a check or credit card. The investor has the choice to decide the payment method.
Yes, they are. The setup fees and annual maintenance fees paid out-of-pocket to the custodian of your Gold IRA are 100% deductible expenses from taxable income.
If you have opted to pay the annual maintenance fees for your Gold IRA out-of-pocket and missed paying the fees on time, you will be charged a late fee. This will be the case if the delay in payment is short-term. When the annual fees remain unpaid for longer periods, the IRA custodian may be able to take the payment out of unutilized funds in the IRA. In case this too falls short, the custodian may be able to sell the assets to realize the payment.
A Gold IRA is just part of the Precious Metals IRA which allows investment in the physical form of four precious metals - gold, silver, platinum, and palladium. As long as the custodian of your Gold IRA is offering investment choices in other metals, you can sell your existing gold bullion and buy other metals. If this is not the case, you can transfer the assets of the IRA to another custodian offering services you want.
Both changing metals within the IRA and transferring assets to another custodian do not have tax implications.
Yes, you can. If you are unsatisfied with your current depository due to safety, location, fees, or any other issue, you can choose to change the depository. Most custodians offer multiple depositories. You may move the assets to one of the other depositories offered by your IRA custodian if you find them satisfactory.
If not, you may choose any depository to store your assets, provided the custodian has arrangements with them. If not, you may have to transfer your assets to a new custodian who offers the storage facility of your choice.
No, you are not allowed to borrow money from your IRA in normal circumstances. Any money taken out of a Gold IRA is treated as a distribution and taxed accordingly. To put the money back into the account you have to comply with the annual contribution limit.
However, by using the rollover option to transfer funds between IRAs, you can take money out of your IRA without being taxed, provided you return it within the 60-day window. A rollover is also exempted from an early distribution penalty levied for those below the age of 59½ years. An investor is allowed one rollover in a year.
Because of the Covid-19 pandemic, Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020. This allows eligible retirement account owners more concessions in repayment.
A custodian is an IRS-stipulated requirement for a secure and legally-compliant retirement account, irrespective of whether it holds precious metals or other assets. In addition to ensuring fast and trouble-free transactions, custodians help in dealing with the tedious administrative work associated with the account and timely reports to the IRS.
As questions are being raised about the health of the economy and the media outlets flooded with advertisements for Gold IRA – some promising high returns, others prompting investors to invest in gold before it is too late and a few even evoking fear about market collapse – investors are naturally confused, skeptical and disillusioned.
In between all this cacophony of voices, finding a reliable and trustworthy Gold IRA custodian can be challenging. There is no need to worry. All you need to do is to invest some time in understanding the basic IRS rules and the operational fundamentals of a Gold IRA. And, do some research, both online and offline, before choosing a custodian.