Self Directed IRAs, the future holds even less supervision

One of the cardinal rules of IRAs is that they have to be “administered” by a bank, trust company, or something called a non-bank custodian.

Apparently in the wake of the Madoff scandel the IRS decided to crack down on the non bank custodians to make sure they were doing things right.  Well, TIGTA, the entity that audits the IRS, audited the results of the audit on the non bank custodians.  TIGTA came to the conclusion that the IRS should “should reevaluate the balance of nonbank trustee program and regular examination program work to ensure the workload is in line with the Employee Plans function’s compliance priorities”.  (Where do people learn how to write such gems?  Can’t they just say the IRS should only audit one or two nonbank custodians, not 30% at a time?)

So what is the practical net effect of this?  Probably not much.  Most nonbank custodians are either doing plain vanilla stuff or are setup for just one investment.  What the service really needs to do is to identify those nonbank custodians that allow for crazy stuff and then look through the actual investments that were allowed by the nonbank custodian.  There is no doubt in my mind a large number of IRAs would be invalidated.

Here’s a link to the audit report of TIGTA on nonbank IRA custodians