Don’t Fall Victim to Self-Directed IRA Fraud

Traditional individual retirement accounts allow you to invest in what some would consider safer options such as stocks, bonds, certificates of deposit and mutual funds. Unlike traditional IRAs, self-directed IRAs offer a wider range of alternatives, including real estate, private company stock, cryptocurrency and precious metals.

As the account holder, you are responsible for doing your own due diligence in terms of understanding the risk for each investment. It is unfortunate that SDIRA investors often fall victim to fraud; however, there are steps that can be taken to mitigate the risk.

What to watch out for

Here are actions you can take to avoid losing your investments as an SDIRA holder:

• Some claim that SDIRAs offer more diversification than traditional IRAs do. If you look at some of the investments, you may notice that a large portion of the portfolio represents a sizable portion of assets. For example, investing in real estate is not a small purchase. Cryptocurrency is considered a highly volatile and risky investment. If it’s diversification you’re after, consider buying mutual funds that invest broadly in these industries.
• When you enter the SDIRA market you will not be able to avail yourself of financial advice from mainstream brokerage firms. SDIRA custodians do not offer advice. They are there to function as administrators of your account, handling the necessary paperwork. For this reason, it is a good idea to hire an investment professional to keep an eye out for potential fraud.
• The Securities and Exchange Commission has issued warnings to SDIRA holders. You should not consider investing in newly formed companies that do not have a track record or companies that claim extraordinary rates of return or lack financial statements from reputable CPA firms. If it seems too good to be true, it probably is.
• Managing an SDIRA comes with a hefty price tag. You can typically expect to pay custodians account setup fees, an annual fee and a fee for each asset in your account. Depending on the size of your account, you can expect to pay anywhere from a few hundred dollars to thousands of dollars each year. Make sure you understand what you are paying for.
• A real estate rule set by the IRS for SDIRA holders is that they cannot use or manage any property they own for their personal use. For example, if you own a desirable lakeside property, neither you nor your friends can take a vacation there. If you get caught breaking this rule, the IRS can void your entire IRA and force you to take out the balance of the account, which will be subject to taxes.
• If you own or invest in precious metals, you will need to set up a separate SDIRA for that purpose. You will also need to find a specialty custodian that handles precious metals. Work with an IRS-approved bullion or coin dealer to avoid fraud. The custodian will have physical possession of the metals. The metals cannot be stored in a home safe.

If you are an SDIRA investor, make sure to consult with an accountant, a lawyer or a financial adviser for more information to protect your assets from fraud.

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