A custodian or trustee must oversee an individual retirement account. The two terms are similar, but subtle differences apply. A trustee must meet all the requirements of a custodian and may also have the power to decide investments and distributions.
An IRA custodian can be a bank, credit union, mutual fund company, insurance firm or other financial institution approved by the Internal Revenue Service. An IRA can be part of an employer or employee trust account or part of a simplified employee pension. The custodian normally decides what types of investments you can own in the account. If you want to put your nest egg in nonstandard assets like real estate or precious metals, you can use a self-directed IRA custodian that specializes in these investments.
An IRA custodian must ensure yearly contributions don't exceed federal limits. As of 2013, this amount is $5,500, or $6,500 for IRA owners age 50 or older. The contribution must be in cash only. A custodian can accept rollovers in excess of these limits, and rollovers can include non-cash property. The custodian can't accept life insurance policies or withhold IRA assets from the owner. It can't mix IRA assets with other property, except for a common trusts or common investment funds. The custodian of a traditional IRA must begin making required minimum distributions when the owner reaches 70 1/2.
A custodian or trustee is a "fiduciary" if it exercises any authority managing an IRA, controls its assets or distributions, gives paid investment advice, or has any control over administering the account. If a fiduciary, owner or owner's family takes part in a prohibited transaction, the IRS may force the distribution of the IRA. The owner must then pay taxes as if the entire IRA was distributed on Jan. 1 of the transaction year. The IRS prohibits a number of transactions, such as a fiduciary receiving unreasonable compensation for managing an IRA.
If an IRA is in an employer or employee association trust, the IRS won't dissolve the account if the owner didn't help a fiduciary carry out the prohibited transaction. The custodian, or anyone else other than the owner or beneficiary who engages in a prohibited transaction, may be liable for an excise tax ranging from 15 percent to 100 percent of the transaction amount.
An IRA custodian must keep all of the records necessary to administer the account properly. This includes recording contributions, rollovers, investments and distributions. It also must give certain information to the account owner and the IRS. This includes Form 1099-R, which discloses the annual distributions from the account, and Form 5498, which reports contributions and the account's year-end fair market value.
The account owner must receive copies of the forms by the end of January. The custodian provides a distribution code on Form 1099-R. This describes an IRA distribution and can affect IRS taxes and penalties. If the custodian becomes aware of an error, it must issue a corrected Form 1099-R.
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