Individual Retirement Accounts (IRAs) are a common way to save for retirement, offering tax advantages and financial security. However, many people are unsure about who manages or oversees an IRA. The role of a trustee in an IRA is important, as it impacts how the account is handled during the owner’s lifetime and after their passing.
Understanding the Role of a Trustee in an IRA
An IRA trustee is a financial institution or entity responsible for holding and managing the assets within an IRA. Trustees must comply with IRS regulations, ensure proper tax reporting, and facilitate transactions such as contributions, distributions, and rollovers.
The trustee has fiduciary duties, meaning they must act in the best interest of the account holder. Unlike traditional trusts, where an individual can be named as a trustee, an IRA trustee must be an IRS-approved institution such as a bank, credit union, trust company, or other financial firm authorized to handle retirement accounts.
Types of IRA Trustees
Not all IRA trustees operate in the same way. There are two main types:
- Custodial Trustees – These trustees primarily focus on recordkeeping and ensuring compliance with tax laws. They do not provide investment advice but execute transactions as directed by the account holder.
- Discretionary Trustees – These trustees have more control over the IRA and may make investment decisions on behalf of the account holder. This setup is more common in self-directed IRAs.
Who Can Be the Trustee of a Self-Directed IRA?
A self-directed IRA gives the account holder more control over investment choices, such as real estate, private businesses, or alternative assets. However, the trustee or custodian still plays a role in overseeing the administration of the account.
A self-directed IRA trustee:
- Must be a qualified financial institution.
- Cannot be the account holder themselves.
- Ensures that investments comply with IRS rules and regulations.
What Is a Trusteed IRA?
A trusteed IRA is different from a standard IRA because it includes a built-in trust structure. This allows the account holder to set rules for how the assets are distributed to beneficiaries after their death.
Benefits of a trusteed IRA include:
- More control over how and when beneficiaries receive funds.
- Protection of assets from creditors or irresponsible spending.
- The ability to provide income to a spouse while preserving the remainder for other heirs.
Trustee Responsibilities After the Account Holder’s Death
When the original account holder passes away, the IRA trustee ensures that the assets are transferred to beneficiaries according to IRS rules. Depending on how the IRA is set up, the trustee may:
- Pay out required minimum distributions (RMDs) to beneficiaries.
- Oversee continued management of the funds if a trust structure is in place.
- Ensure compliance with tax laws to avoid penalties.
Choosing the Right IRA Trustee
Selecting an IRA trustee is an important decision. It is best to choose a reputable financial institution with experience handling IRAs. Consider factors such as:
- Fees and administrative costs.
- Investment options and flexibility.
- Customer service and ease of account management.
Need Guidance on Setting Up a Trusteed IRA?
Understanding the role of an IRA trustee can help you make informed decisions about your retirement planning. Whether you are managing your own IRA or considering a trusteed IRA for estate planning, having the right trustee in place is important for long-term financial security.
If you need guidance on selecting an IRA trustee or setting up a trusteed IRA, contact Salines-Mondello Law Firm at (910) 777-5734. Our team in Wilmington, NC, can help you plan for your future with confidence.