What a Custodian for a Self Directed IRA Does

What a Custodian for a Self Directed IRA Does

So you want to buy real estate through your individual retirement account (IRA). Normally, individuals either buy real estate directly or set up an entity like an LLC to buy it on their behalf. When buying real estate through a self directed IRA, a custodian is a necessity. Federal tax law & regulations stipulate that both standard and self directed IRA accounts shall be held by a custodian. The custodian’s role is administrative, making sure assets (whether stocks, bonds or real estate) have proper titling, asset ownership and providing IRA owners periodic statements and reports. Custodians however do not offer investment advice.

Custodian vs. Checkbook IRAs

In a self directed IRA, the Custodian often has significant responsibilities. If the self directed IRA is a custodian account, the custodian actually places the money for the investment. If you bought a single family home through your self directed Custodian IRA, you would authorize the home investment and the custodian would write the check from your IRA. For a checkbook control account, the custodian does not make the purchase, you do, just by writing a check. In fact, in the so called checkbook account IRA, the custodian plays a mandatory legal role but has little or no interaction with the account itself.

“Low” and “High” Maintenance Investments

The custodian type of self directed IRA is cheaper and better suited for “low maintenance” investments. If you choose to manage your self directed IRA with the custodian model, then the choice of custodian becomes very important. Since all of your documentation, asset management, and financial dealings will be going through the custodian, it’s imperative that you find one that is reputable, professional and responsible. If you’re investing in a property that you will be managing personally, then it’s probably worth it to upgrade to the convenience and economy of a checkbook control self directed IRA.

The following table illustrates the differences between “custodian” and “checkbook” IRAs

Custodian IRA Checkbook IRA

  • More typical version of the Self Directed IRA
  • custodian manages transactional activity like asset maintenance, repair, purchase, sale
  • Ideal for no to low maintenance investments (one time investments in a company or private equity fund)

  • Investor manages all transactional activity
  • IRA investor is non-compensated manager of LLC Lower transactional costs
  • Easier administration
  • Best suited for “high maintenance” investments with frequent transactions


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