5 Tips for Protecting Your Self-Directed IRA from Fraud

self-directed IRA
23
Aug
self-directed IRA

Investing in your future financial security is one of the wisest decisions you can make. Planning for your retirement now can provide you with peace-of-mind for the future. There are many ways you can invest in retirement savings; one of the most popular being through an Individual Retirement Account (IRA). The great thing about IRAs is that there are several different types available, so you can find the one that suits your investment plan.

However, most traditional IRA savings accounts offer a limited selection of investment options. Typically, they offer a selection pre-approved by the firm or entity servicing your investment account. If you are looking for greater flexibility in terms of investment options, you may want to consider opening a self-directed IRA account.

Self-directed IRAs allow you to invest in a broader portfolio of assets than traditional IRAs. What’s important to understand, however, is that with greater flexibility in your investment options, you may be subject to additional risks.

As is the common case with self-directed IRAs, the oneness is on you to mitigate the investment risks accordingly. While you do have a designated custodian assigned to your account, most duties – and due diligence – regarding risk mitigation fall on you. The custodian primarily serves as an account facilitator; a registered financial professional which executes transactions on your behalf.

Investing in self-directed IRAs without an understanding of the associated risks can mean falling victim to fraud, exorbitant fees and volatile asset performance.

How Your Self-Directed IRA May be Subject to Fraud

Because self-directed IRA accounts have limited protections compared to traditional retirement investment accounts, many fraudsters think this makes easy targets out of self-directed IRA investors. There are several methods which fraudsters may try to use to dupe and scam investors:

Misrepresenting your account custodian’s responsibilities

Often, fraudsters will rely on misinformation regarding your account custodian’s responsibilities and duties. As we mentioned earlier, elf-directed IRA custodians merely serve to facilitate and execute your investment decisions. It is not necessarily in their scope of duty to evaluate the performance quality or legitimacy of an asset.

Preying on passive investors

Because IRAs are tax-deferred investment accounts, the intent is to put money in and let it mature over time. Thus, you are subject to a penalty for early withdrawals. Due to the nature of these accounts, many investors tend to take a passive approach to account oversight.

While it’s good to let your account mature, leaving your eyes off it for too long may be enough time for a fraudster to take advantage.

Taking advantage of investor misunderstanding

Many alternative assets available to you through your self-directed IRA have limited, publicly-available financial information. Fraudster like to take advantage of this fact and use it to prey on unwitting investors.

5 Tips for Protecting Your Self-Directed IRA from Fraud

Despite the risk of fraud, self-directed IRAs remain a popular and practical retirement saving choice for many investors. The flexibility these types of IRA accounts provide allow you to diversify your retirement savings beyond traditional assets. Through a self-directed IRA, you can invest your savings in things like real estate, promissory notes and tax liens.

As with any other form of investment, the best tool at your disposal is education. If you can understand the risks, especially as they relate to fraud, you can learn how to prevent it. Here are five tips for protecting your self-directed IRA from fraud.

Verify your account information

Because some alternative assets may be difficult to value in a traditional sense, you account custodian may assign the value in one of the following ways:

  • the original purchase price
  • original purchase price, plus returns reported by asset promoter
  • the price provided by the promoter

It’s important to always review these values on your account statements. If you can, try to verify the asset values on your own.

Stay away from unsolicited investment offers

Starting a self-directed IRA account should be a decision that you make on your own or with the assistance of a trusted financial advisor. It is wise to steer clear of any unsolicited offers that promote investments through the use of a self-directed IRA, especially if that offer prompts you to transfer funds outside a traditional, protected account.

Always vet your investment offers

Since you can’t rely on your account custodian to verify the legitimacy of investment offers, it’s up to you to take those steps. The best way you can find out if an investment opportunity is legitimate is to start asking questions.

Don’t be afraid to ask the person offering you an investment if they are properly licensed and registered, and if the investment is a registered asset. If you are unsure of anything or something doesn’t sound right, ask your state or federal securities regulator.

Remember: there’s no such thing as a “guaranteed” return

It would be nice, but that’s just not the way it works. Risks are inherent in any investment offering and anybody who tells you otherwise is probably trying to take advantage of you. Risk is directly correlative with returns; to have the potential for high returns, you have to have the potential for increased risk.

Don’t rely on the promise of “no risk” or “guaranteed” when it comes to investment offers promising big payouts. If you don’t have the financial stability to cover a big loss, it’s never a good idea to take a big risk.

“Self-directed” doesn’t mean you have to go it alone

In some ways, self-directed IRA is a bit of a misnomer. While these investment accounts allow you greater flexibility and direct control over your retirement planning, it doesn’t mean you need to be a financial expert to have one.

Before investing in an alternative asset through your self-directed IRA, consult with a financial professional. Always consider getting a second opinion on your offer from an unbiased, licensed financial professional or attorney.

Investor Resources

If you’ve fallen victim to a an investment scam or you believe your self-directed IRA account has been compromised by fraud, contact our team.

Our experienced investment fraud attorneys have the resources and know-how to find you proper recourse after an investment-loss.