Need a New Self-Directed IRA Custodian? Here’s Everything You Need to Know

Published on October 21, 2021

From time to time, financial institutions close or terminate certain programs. In some instances, that may mean that an IRA custodian—the entity that is holding your retirement assets—is shutting down its business.

When that happens, the account owner must find a new custodian for purposes of transferring the IRA funds to a new “home,” or possibly face taking an early distribution.

While at a glance, taking an early distribution seems to be the easy choice, but depending on your age and the health of your account, you could be facing potentially steep consequences. If you are not at least 59½ years old, you are typically not eligible to take a distribution from your IRA without being penalized and having to pay taxes on the amount distributed. We strongly encourage you to consult a trusted tax advisor before electing to take an early distribution.

The other option is to find a new IRA custodian. If you were happy with your prior custodian and have to transfer your account to a new custodian, this may seem daunting. It is important to choose a custodian that prioritizes its clients, first and foremost, but there are several things to consider.

Shopping for a self-directed IRA custodian

Just as you take care to find the right accountant or financial planner, you want to make sure you are comfortable with your new IRA custodian. Investors with a self-directed IRA (or any type of self-directed account that allows alternative investments) require a firm with experience in these types of retirement plans and the many alternative assets they can hold. While the tax advantages associated with self-directed IRAs are the same as their “regular” counterparts, the investment options are far broader, enabling investors to build more diverse retirement portfolios.

When considering a new custodian, you should look for one that:

• Understands IRS regulations and other aspects of self-direction as a retirement strategy, and offers educational resources to its clients and potential clients
• Reviews transactions thoroughly to mitigate the risk of a prohibited transaction, which could endanger the account’s tax-advantaged status
• Simplifies the transfer process by providing easy access to all account opening documentation, and employs representatives to walk you through the setup and funding processes
• Prioritizes customer service and has live representatives available via phone and email, sans voice prompts and auto-replies
• Offers transparency about their administrative and transactional fees

A company that provides both custodial and administrative services offers the ideal scenario, since that firm will manage all your account paperwork, generate all required statements, and handle required tax reporting with the IRS under one corporate umbrella. You’ll find this arrangement at Next Generation with our two sister companies- Next Generation Trust Company as custodian and Next Generation Services as administrator – working in tandem on behalf of our clients.

Transferring cash from like account to like account

Account owners will not incur IRS tax penalties when transferring cash from one IRA to another—from like account to like account. That means from Traditional IRA to Traditional IRA, Roth IRA to Roth IRA, and so on. The new custodian will ask for certain documentation to ensure the funds are coming from the same account type and that the funding amount is available to execute that transfer.

Note: Although a custodian that is closing its business will not (or should not) charge you any account closing or transfer fees, you may incur these if you are making the move for personal reasons. Be sure to thoroughly review the fee schedule so you are aware of this upfront.

In-kind asset transfers

If you are transferring public securities from a regular IRA at a brokerage to a self-directed IRA, some receiving custodians may require that those assets be liquidated before conducting the transfer. However, alternative assets can be transferred in-kind to from one self-directed IRA to another. These assets may include real estate, private equity, precious metals, cryptocurrency, or any of the other asset types that can be held in self-directed IRAs.

When transferring assets in kind, note that the new/receiving custodian will typically require additional documentation (including an updated asset value) depending on the asset type. The assets are then re-registered, with the assets vested in the name of the new self-directed IRA.

The new custodian will contact the resigning custodian, provide funding instructions to initiate the transfer, and follow up on required documentation (which includes a letter of resignation from the existing custodian). It’s also important that the account owner follow up with the current custodian to provide authorization and prevent any processing delays.

You’ll find more details about the steps required to execute an asset transfer between self-directed IRA custodians in this blog post. Of course, if you have questions about how to transfer cash and/or assets from your current IRA custodian to Next Generation, don’t hesitate to contact us at NewAccounts@NextGenerationTrust.com or 888.857.8058. As always, you can also schedule a complimentary educational session with one of our representatives if you’d like to discuss your unique situation.