What is a Self-Directed IRA (SDIRA)?

What is a self-directed IRA?

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.

What is an IRA custodian?

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.

Why is fraud more likely to occur within self-directed IRAs?

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.

What are the other risks associated with self-directed IRAs?

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.

How can you avoid fraud with a self-directed IRA?

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:

  • Consulting a professional before making any investments
  • Being cautious of guaranteed high returns or any investment that sounds too good to be true
  • Doing due diligence on all investments and the people behind them
  • Researching your custodian’s history and background
  • Verifying all information provided in self-directed IRA account statements

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.

Take the next steps to find out if you have a claim:

Step 1.

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Step 2.

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If you decide to hire us to pursue your case, we will have you sign an attorney-client agreement so we can begin the process of trying to recover your losses.*

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