Bank Trust Custodial Account

A bank trust custodial account is a type of Individual Retirement Account (IRA) in which contributions are paid into the bank's interest-bearing financial instruments or a self-directed account, which is managed by the IRA holder. The appeal of the bank trust custodial account is that it gives an IRA holder considerable investment flexibility and a tax-advantaged option for retirement savings.

Bank trust custodial accounts were first allowed by the Employee Retirement Income Security Act of 1974 (ERISA). This act came about after a push for pension reform legislation at the federal level. The legislation was enacted to ensure that pension and retirement plans offered by employers are fair and secure. ERISA established rules and regulations to govern private pension plans, including vesting requirements, funding mechanisms, and general plan design and descriptions. Under ERISA, employers are not required to offer pension or retirement plans, but the law does outline basic standards that apply to any employer who does offer a pension plan.

The main difference between the two types of bank trust custodial accounts has to do with how much control the IRA holder has over their retirement funds: A self-directed account puts the investor in charge of investment decisions, whereas the investor who contributes to the bank's interest-bearing account does not manage the funds. Self-directed accounts are usually set up by a brokerage and the investor is charged an amount above trading costs.

Self-directed IRAs can offer great flexibility for investors who want to have a more hands-on role with their retirement investments. It also can be a useful option for those who want to pursue less-common types of investments, such as gold or other precious metals, real estate and horses. These types of investments tend to be more volatile, and the bank that serves as custodian for the account does not vet the investments. Because of the higher risk, investors may find it difficult to find an institution willing to serve as a custodian for self-directed accounts.

Holders of self-directed accounts face the additional challenge of following the rules that apply to these accounts. For example, self-directed IRAs cannot own collectibles such as antiques, rugs or stamps. They can, however, own coins such as Krugerrand gold coins. These accounts also must avoid prohibited investment activity with disqualified parties, which include the IRA owner’s spouse and children. The consequences for the investor who runs afoul of these rules can be costly.