Self-Directed IRA Expert: Horizon Trust BlogNovember 19, 2021by horizontrust3 Ways to Protect Yourself from Self-Directed IRA Scams

As you navigate retirement planning, you may have heard about the unique value propositions a self-directed IRA can offer investors. 

Self-directed IRAs can offer the same tax-deferred and tax-free benefits of traditional and Roth retirement accounts in addition to investment opportunities with a more diverse set of asset classes.

The potential benefit of adding a self-directed IRA to your investment portfolio will depend on your risk tolerance, investment experience, and financial situation. 

In any case, prospective self-direct IRA owners should educate themselves on related scams to help avoid the chances of unnecessary financial loss. 

What Is a Self-Directed IRA?

A self-directed individual retirement account (SDIRA) is an investment vehicle that people use to save and grow their money for when they stop working. 

The main feature of an SDIRA is that you can invest funds in a wider range of alternative assets when compared to standard IRAs and 401(k)s. 

The investment options of standard retirement accounts include common financial instruments like publicly traded stocks, bonds, ETFs, and mutual funds. In comparison, an SDIRA can hold assets such as: 

  • Real estate (e.g., residential or commercial property, tax deeds, mortgage or deed of trust notes, etc.)
  • Precious metals (gold, silver, etc.)
  • Foreign currencies 
  • Cryptocurrencies 
  • Private equity (i.e., ownership interests in closely held businesses such as LLCs, partnerships, and corporations)

An SDIRA can be a traditional or Roth account, which determines the tax consequences of the contributions, gains, and qualified distributions. Aside from the investment options, the other large difference between an SDIRA and IRA is who controls and manages the investments. The account owner (i.e., you) is responsible for managing the investments. 

However, a certified SDIRA custodian – like Horizon Trust – must hold title to the account and its assets for the benefit of the owner. The custodian then helps with required recordkeeping and IRS reporting. 

What Are the Top Self-Directed IRA Scams?

While an SDIRA can be a useful method for diversifying your portfolio and maintaining the tax-advantaged status of an IRA, you should be cautious of scams and other fraud. 

People with SDIRAs are particularly susceptible to scams for a couple of reasons. One reason is the potential lack of professional oversight with the invested funds. 

The other reason is that SDIRA owners may have little knowledge about the alternative assets that they choose to invest their funds in. 

Purchasing Non-Existing Investments

SDIRA scams generally come in one of two forms. The first is an illegitimate sale of a non-existent asset.

You may receive official-looking documents evidencing proof of ownership (e.g., purchase agreements, deeds, and other title records), but the asset may not actually exist (or the asset does exist, and your paperwork is fake or not properly recorded). 

The risk of buying a non-existent asset is especially prevalent in the age of digital assets and cryptocurrency assets that lack intrinsic value and aren’t tied to any tangible asset. 

Purchasing Fraudulent Investments

Other SDIRA fraud may involve legitimate transactions with real investments and assets. However, those investments may be rife with overpriced assets, misrepresentations, undisclosed risks, or other fraudulent activity that increases the chances of a future loss. 

Modern Signs of SDIRA Scams

Identifying scams when investing your SDIRA funds can be challenging, especially for those unfamiliar with the prospective assets or their related industry. When evaluating a potential investment, be wary of the following activity as it may indicate an increased risk of fraud:

  • Guarantees of returns on your investment (all investments carry risk and positive returns are impossible to guarantee)
  • Promises that are too good to be true
  • Representations or other certifications of IRS approval
  • Excessive transaction fees 
  • Aggressive solicitations and social media promotions 
  • Leveraging affinity connections (i.e., using ties to churches, charitable organizations, veteran groups, and other entities that connote strong feelings of trust and honesty)

What Benefit Does Someone Get from Scamming Your Self-Directed IRA?

The benefit inured to someone from offering you an SDIRA scam is the access to your hard-earned capital. The scamming party may do several things with those funds that may be to your detriment. 

This might range from behavior like absconding with the funds to placing the money in high-risk scenarios that lead to loss. 

3 Methods to Reduce the Risk of a Self-Directed IRA Scam

When assessing various investment opportunities through an SDIRA, taking certain precautions may help reduce the risk of losing funds to scams or other fraud. 

Seek Counsel from Attorneys, Accountants, and Other Business Professionals

Prior to finalizing an investment, you may consider enlisting the help of a lawyer and other advisors who can help you spot red flags and potential scams. 

You can leverage the broad range of experiences from professionals to help you verify documentation ask the right questions about an investment. Additionally, licensed professionals who solely represent your interests may provide an objective perspective and inform you about the risks of a particular investment opportunity. 

Closely Monitor Investments and Maintain Good Documentation

An investment scam may not always be visible from the outset. Some investment scams may also begin with altruistic intentions but turn fraudulent during their course due to bad actors. 

In either case, keeping a careful watch over your investments may help you become aware of fraud as soon as possible and protect again future loss. 

Keep in contact with representatives from the investment company or administrator, keep all related documentation, and review financial statements for discrepancies. 

Keep a Diverse and Balanced SDIRA Portfolio

SDIRA investments may be particularly risky even without the added risk of malfeasance and scam-like behavior. 

To reduce these risks, you may consider placing funds in a variety of assets and avoid placing your entire portfolio in one or two alternative assets. By diversifying funds, you may mitigate potential losses from a scam investment and preserve the remainder of your wealth.

Have More Questions About SDIRA Scams or Want to Create an Account?

Horizon Trust offers custodian services for those who want to self-direct their IRA funds into a wide range of investment opportunities beyond what you might find through traditional stock market offerings. 

We pride ourselves on providing excellent customer satisfaction with respect to high-quality reporting standards, timely funding for your investments, and other custodial services. 

If you want to learn more about our SDIRA custodian services or want to open an account with us, please schedule an appointment with one of our representatives. 

Book an appointment with Horizon Trust today to establish your self-directed IRA.