Self-directed IRAs are tax-deferred retirement accounts in which the investor is in charge of “directing” the investments held in the account. Self-directed IRAs allow for the investment in a wide array of assets than otherwise would be allowed by the typical IRA custodian. These include investments in “alternative investments,” which are investments different from traditional asset classes of stocks, bonds and cash and may include things such as hedge funds, real estate, commodities and precious metals. Self-directed IRAs allow for risky investments and have the potential to open the door to a fraudster who will intentionally deceive clients.
Self-directed IRA Risks
The Securities and Exchange Commission (SEC) has advised investors that self-directed IRAs and similar arrangements carry nuanced risks that must be accounted for. As an example, investments held in self-directed IRAs tend to have problems with liquidity, elevated fees and a greater chance of fraud. Scammers are more inclined to exploit these types of investment as the custodians of such accounts provide minimal protections. Trustees of self-directed IRAs tend to do a poor job of investigating assets or the promoter background.
What to Watch out For with Self Directed IRAs
The SEC has done an excellent job of identifying the many different ways in which scam artists use self-directed IRAs to pull of a fraud scheme. For example, scammers often misrepresent self-directed IRA custodian duties to fool investors into thinking their investment is legal or protected against such losses. Evildoers might claim to investors that self-directed IRA trustees analyze and validate all of the investments held in self-directed IRAs. But that rarely, if ever, happens.
Self Directed IRA Penalties
The majority of self-directed IRAs have a penalty for withdrawing money prior to a specific age. The possibility of a severe penalty is enough to convince investors to be passive with account management, making it that much easier for the fraudster to continue defrauding investors.
Self-directed IRA Fraud is Even Extending to Digital Assets
Some self-directed IRAs allow investments in the form of digital assets. Initial coin offerings and cryptocurrencies can now be invested yet there are plenty of unknowns and grey areas when it comes to putting money in digital currencies. This provides fraudsters with an increased opportunity to rip off profit-seekers.
Do not be Afraid to ask Questions
When in doubt, do not fork over your money assuming the alternative investments held in a self-directed IRA is worth a roll of the dice. Be patient, ask questions and perform your due diligence. If you do not feel comfortable around the agent, refuse to invest. Ask as many questions as it takes to obtain a full understanding of where your money will go and the risks to which it will be subjected. Ask questions of the trustee and/or custodian. Find out about the investment group’s background and history. Do not hesitate to ask for reviews and references of the promoter. The more you learn about the promoter and trustee/custodian, the less likely you will be to fall prey to a fraudster.
Conduct your due diligence, do some digging, and you will have a better idea of the types of investment promoters who would like to do business with you. Even something a simple as conducting a Google search for the firm’s name and principals can reveal useful information. Search for the group’s rip off report, look up online complaints and find out if there are any accusations of fraud or scams.
Finally, do some digging about the company’s status and compliance. If they are licensed, active and have a positive compliance history, keep searching for information and you will ultimately be able to make a well-informed decision. If you feel as though you have been even slightly taken advantage of or if you are uncertain about the terms of a prospective investment, reach out to our attorneys for assistance.