Individual retirement accounts, also known as IRAs, are held by trustees or custodians. The conventional agreement between the investor and the holder of the investment is governed by federal banking laws. Self-directed IRA accounts allow less guidance by the trustee for the individual contributor, but the trustee is still held accountable for ensuring that the investments meet federal and state investment laws.
Trustee Qualifications
IRS Publication 590 states that a trustee must be approved by the Internal Revenue Service. Banks, credit unions with federal insurance, and savings and loan organizations all qualify as potential trustees. Strict federal and state guidelines are in place regulating investment and distribution of IRA funds. Serious investor tax consequences may result through improper handling of funds and distributions.
Guidelines for Investment
There are levels of qualifications for trustees. Even when a bank or credit union qualifies as a trustee, other measures ensure lack of errors and quality of investment for the contributor. These include membership in the Better Business Bureau, regular audits by an independent, qualified company, proof of errors-and-omission insurance coverage, additional coverage under FDIC or SPIC insurance policies, and proof of financial resources backing the investment company.
The trustee should also belong to a group that regulates the overall company investment standards, such as the Office of the Currency Administrator of National Banks, Office of Thrift Supervision, and the National Credit Union Administration.
Restrict Investments
Trustees must monitor the manner in which IRA funds are invested. Current restrictions prevent self-directed account investments in alcoholic beverages, gems, stamps, antiques, rugs, artwork and certain metals and coins. IRA trustees may also restrict self-directed investments in real estate, due to the high cost of administering that type of investment.
Supervise Rollovers
The IRS Publication 590 requires trustees to supervise rollovers of the IRA into other accounts. A rollover is a "tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan," according to the Internal Revenue Service. The trustee refers to funds moved from one account to another as a "rollover contribution."
Trustees must also assist in rollovers, including transferring money from one account into a traditional IRA, a state or local deferred compensation plan, an employer retirement plan or to a tax-sheltered annuity plan, but the ultimate responsibility for accurate reinvestment of the funds within 60 days remains with the investor, according to a June 14, 2008 article in the Wall Street Journal, "Uncle Sam Gets Tougher on IRA Error."
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