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April 18, 2009

Custodian

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Definition

The definition of custodian depends on the responsibility of the financial institution.   To make the necessary distinction between the different roles they play for retirement accounts, financial institutions often use an upper-case C and a lower case-c. These are not dependent on each other; as such, a financial institution can serve in either capacity for a retirement plan, or serve in both capacities at the same time. There are some custodians that require that where a retirement plan chooses them to serve in the capacity of uppercase C-Custodian; the retirement plan must also have them serve in the capacity of custodian (lower case c). The upper-case C-Custodian usually applies to IRAs, but can apply to other retirement plans/accounts such as qualified plans, 403(b)s, 403(a)s and governmental 457(b)s. Generally, the qualified plans for which they serve in the capacity of upper case C-Custodian are prototypes sponsored by small businesses.
Lower case c-custodian
The lower case c, is used in the capacity of the financial institution ‘holding’ the assets either in street name or physically, i.e., they have the assets in their custody. In such cases, the financial institution has no fiduciary responsibility for the account. 
Upper case C-Custodian
The upper case C is used when the financial institution serves in the capacity of an IRS approved Custodian for retirement accounts, such as Custodian for IRAs. If the financial institution is a bank, it is already approved by default to serve as an IRA Custodian. Brokerage firms and Mutual Fund Companies must apply to the IRS to be approved to serve as custodians; these are referred to as nonbank trustees or nonbank custodians.
Referring Cite
Treas. Reg. 1.408-2(e)
Additional Helpful Information
  • Financial institutions that serve in role of Custodians must meet certain requirements and perform certain duties for the retirement accounts, including the following:
    • Serve in a fiduciary capacity for the retirement accounts
    • Perform duties as assigned by the IRS , such as tax reporting for reportable transactions
    • Ensuring that the retirement assets are not commingled with other assets
    • Ensure that IRAs are not invested in life insurance
  • Nonbank Custodians must prove their ability to serve as Custodians.  This includes proving that they meet certain capital and financial requirements, have the required personnel expertise, have the necessary systems to perform Custodial duties such as tax and other reporting and accounting, be able to process distributions; to maintain records of contributions, withdrawals/distributions and earnings.
  • Generally, Upper case C-Custodians usually get paid to serve in that capacity. This is in addition to whatever they would get paid for serving as lower case c-custodians, which would usually be trading-related fees, fees for holding special products such as private placements, and fees for holding precious metals.                                                                                              
 See the definition of Trustee for information on how the two terms are related.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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