While typical IRAs hold bonds, stocks, mutual funds, and other common investments, a self-directed IRA allows the investor to hold alternative investments, such as promissory notes, real estate, private placement securities, cryptocurrencies, and even precious metals, in a retirement account. Similarly to a traditional IRA, the assets can grow tax-free until the investor withdrawals from the plan.
All IRAs are held by a custodian, which typically includes financial institutions such as banks, trust companies, or any other entities approved by the IRS. Self-directed IRAs are held by specialty custodians that don’t provide investment advice. These custodians do not recommend opportunities, complete due diligence, or take responsibility for the suitability or legitimacy of investments. Self-directed IRA custodians simply handle the administrative work of the account and leave the rest up to the investor.
Fraudsters prey on those with self-directed IRAs because they can sell them investments that wouldn’t typically be permissible through a traditional IRA. Some even go as far as to encourage investors to set up self-directed IRAs for the sole purpose of selling them fraudulent or risky investments. Frequently, money is taken for non-existent investments or assets that exist but are sold at a highly inflated purchase price.
The freedom associated with self-directed IRAs, and the limited responsibility of the custodian, often means that investors find themselves investing in unsuitable or illegitimate assets.
Self-directed IRAs are often associated with large fees including a setup fee, an annual fee, a fee per asset, and transaction fees. Depending on the size of an account, these fees can total upwards of thousands of dollars per year.
There are also complex restrictions that investors may encounter within a self-directed IRA. For example, an investor cannot occupy a property that he or she invests in.
If you have limited investment experience, a traditional IRA is a safer option, however, if you do choose to invest in a self-directed IRA, you can reduce the risk of fraud by:
Self-directed IRA fraud is on the rise. It’s more important than ever to remain knowledgeable of the risks. If you have any questions, or believe you’ve been the victim of fraud, contact our attorneys.
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