Self-managed IRAs require specialized custodian because they allow investments that go beyond publicly traded assets, such as stocks, bonds and funds. All self-directed IRA custodians are prohibited by law from offering investment advice or recommendations to their clients. A custodian is needed for any IRA. The custodian of a self-directed IRA will be different from the regular depositary.
You can't go to one of the big box stores, like Edward Jones or Charles Schwab, and have a truly self-directed IRA. They have accounts that they call self-directed, but in reality you can buy from a fixed menu of investments that they have created for you. Basically, an IRA depositary is a financial institution that keeps the investments in your account in a safe place and ensures that all government and IRS regulations are followed at all times. If you choose the option of a non-self-directed IRA, there are several financial institutions available to act as custodians, once you have established your account with them.
A bank is an option if you want to enjoy the FDIC-guaranteed security of certificates of deposit or money market funds from an IRA. With regard to the custodians of self-directed IRAs, all of the above-mentioned institutions could theoretically provide services. With both traditional and Roth IRAs, you can choose to have the account managed (i.e., the depositary makes most investment decisions) or to manage it yourself. You'll want a custodian who knows the types of possessions the IRS prohibits, even in the case of self-managed IRAs, such as collectibles and alcoholic beverages.
The basic difference is that a traditional IRA reduces your taxable income in the year you make it and defers any tax payments until you start withdrawing funds years later. However, IRAs already have tax advantages, so the tax advantages of annuities are not necessary within an IRA and you can pay high fees for having one. The other problem with these accounts when you have your IRA in a self-directed depositary than in a “traditional custodian” is that it is an IRA account, either here or there, and you still have the same contribution limits for your traditional accounts, SEP accounts, simple accounts and Roth accounts. However, in the financial services industry, a self-directed IRA usually means an IRA in which the custodian allows him to invest outside the more traditional world of stocks, bonds, mutual funds and exchange-traded funds (ETFs).
As long as they're not prohibited by the IRS and are federally legal, you can basically use your IRA to invest in anything. The Securities and Exchange Commission (SEC) published a bulletin for investors warning investors of the possible risks associated with investing through self-managed IRAs. David Moore, of IRA Advantage, and Tom Moore, of Equity Advantage, explore misconceptions about self-directed IRAs and discuss whether a custodian is needed.