Congress first authorized Individual Retirement Accounts in 1974 as a way to allow taxpayers not covered by a qualified plan at work to set aside earnings in a tax-advantaged account. Eligibility for contributing to an IRA has expanded to include most taxpayers who have earned income. While there are few limitations on the types of investments you can place in your IRA, the account itself must be held by either a custodian or trustee.
There are two basic types of IRAs; traditional IRAs and Roth IRAs. Both have similarities and significant differences, primarily involving when funds are taxed. Both types of IRAs can only be set up as a trust or custodial account in the United States, according to the Internal Revenue Service. The account must be operated for the exclusive benefit of the account holder or his beneficiaries.
Custodian vs. Trustee
An IRA does not have to be strictly a custodial account. It can also be a trust account. The differences between a custodial account and a trust account are minor, but significant. Both types of accounts hold funds for the benefit of the account owner, but a trustee has discretionary authority over the funds in the account while a custodian does not.
Types of Custodians and Trustees
INternal Revenue Service rules and regulations limit the types of organizations that can act as a trustee or custodian. Banks, federally insured credit unions, life insurance companies, mutual fund companies, savings and loan associations and investment brokerage firms may serve as a trustee or custodian for IRAs. The IRS maintains a list organizations that are approved to serve as non-bank custodians or trustees.
Custodian or Trustee Responsibilities
The responsibilities of an IRA custodian or trustee are determined by provisions of the trust or custodial account agreement. The responsibilities can vary from simple administrative functions to full investment selection discretion. When opening an IRA it is important to understand whether you are opening a custodial account or a trust account, and the amount of investment authority you are granting to the trustee or custodian.
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