Self-directed IRAs offer investors the opportunity to invest in alternative assets and the power to take more control of their retirement goals. However, that freedom comes with a significant requirement: Due diligence.

Researching and vetting investment opportunities is paramount to success. It’s also an essential step if you want to avoid scammers who work to exploit self-directed IRA holders. Becoming aware of the most common self-directed IRA scams can help you identify potential red flags and protect your hard-earned retirement savings.

How to Avoid Fraud & Scams With Self-Directed IRAs

Spot Self-Directed IRA Scams – Learn the Red Flags

Common Types of Self-Directed IRA Scams

Though a self-directed IRA scam can take a variety of shapes, here are the most common:

Ponzi Schemes and High-Yield Investment Fraud

Ponzi schemes have plagued the U.S. since the early 1900s, and even the savviest investors can become victims today. These schemes use money from new investors to pay off earlier investors, creating the illusion of profit.  Unfortunately, the schemes typically collapse, and most parties are left in the negative.

Real Estate and Promissory Note Scams

Real estate and promissory notes can yield high returns, but only if they’re actually backed by real property. This type of scam centers on exclusive real estate and promissory investment opportunities with the promise of high returns. Unfortunately, individuals who fall victim to this scheme find that the property that “backed” the investment is overvalued, nonexistent, or tied-up in legal issues that prevent the investor from cashing in.

When you invest in tax liens, earnings come from the interest applied to the lien

Fake Custodian or Administrator Fraud

Always research and review a potential custodian, working exclusively with those that are IRS-approved.

Unfortunately, some scams involve individuals or groups posing as custodians, tricking investors into transferring funds into fake accounts. The end result can be a significant loss for those who fall prey.

Unregistered Securities and Unlicensed Advisers

If an advisor isn’t registered with the U.S. Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA), it’s best you walk away. Without due diligence, it can be easy to fall victim to unlicensed financial advisors who push unregistered securities based on high-risk, fraudulent investments.

Stay Secure – Know the Risks of Unverified Investments

Red Flags to Watch Out For

It’s not always easy to identify the type of scam you may encounter, but there are red flags to be on the lookout for. Here are a few that should sound the alarms.

  • Promises of guaranteed high returns. Investment would be simple if outcomes were guaranteed, but that’s simply not the case. If someone promises high returns, it’s probably too good to be true and potentially a scam.
  • Pressure to invest quickly. Time-sensitive investment opportunities do exist, but you should never feel pressured into making an on-the-spot decision. If someone pressures you to invest quickly, slow down and thoroughly evaluate the situation.
  • Lack of transparency or difficulty. Whether you’re vetting an investment or working with a custodian, you should expect a basic level of openness and willingness to provide information upon request. If you’re having trouble gathering basic details, it may not be worth your investment; at worst, it’s a red flag for scams.
  • Unverified or unlicensed investment promoters. Always check the credentials of those selling investments. Doing so can help you easily avoid potential scams.

Once you know what to look for and how to spot potential red flags, these steps can help you further avoid fraud.

1. Verify Custodian Legitimacy

Self-directed IRA custodians must be IRS-approved. Before opening an account, research your custodian and ensure they are appropriately licensed and approved by the IRS.

2. Conduct Thorough Due Diligence on Investments

Before you take advantage of any investment opportunity, research the asset, request and read all local documents, and check for any past issues that may present a problem, such as past fraud allegations or regulatory matters.

3. Understand IRS Rules and Prohibited Transactions

Even though self-directed IRAs offer investors more freedom, they are still highly governed by IRS rules. Understanding those rules, including what constitutes a prohibited transaction and issues that would warrant penalties, can help you make educated decisions.

4. Work With Licensed Financial Professionals

Custodians don’t provide investment advice, so self-directed IRA holders often work with financial professionals who can give valuable investment insights. If you choose to do so, only work with registered financial professionals, using the SEC advisor database or FINRA’s BrokerCheck to verify their background.

5. Maintain Control and Oversight of Your IRA

Even though your custodian carries out administrative tasks for your account, you are ultimately responsible for your IRA. Make it a point to actively monitor account statements, translation details, and investment changes.

What to Do If You Suspect Fraud

If you suspect fraud or believe a scam has targeted you, it’s essential to act quickly. Report suspected fraud to the SEC, FINRA and your state’s securities regulator. If you’ve already lost money, consult legal and financial professionals who can help you determine what, if any, recovery options exist.

Finding an IRA Custodian You Can Trust

Choosing a trustworthy IRA custodian is crucial for safeguarding your retirement assets and ensuring compliance with IRS regulations. Here are key factors you should consider when selecting a custodian:

  • Reputation and experience. Look for a custodian with a solid track record and extensive experience in managing self-directed IRAs and the type of assets you’re interested in, such as real estate, cryptocurrency or private equity.
  • Approved and licensed. Ensure the custodian you choose is IRS-approved, licensed and bonded to legally manage client assets.
  • Review the fee structure. All custodians charge fees, but it’s important you choose one that is transparent about their fee structure. Before you open an account, you should have full knowledge of any fees you may encounter, including setup fees, transaction fees, annual maintenance charges, etc.

By partnering with a reputable custodian like Horizon Trust, you can confidently navigate the complexities of self-directed IRAs, ensuring your investments are secure and aligned with your financial goals.

FAQs

How common is fraud in Self-Directed IRAs?

Because self-directed IRAs allow for alternative asset investment, they are more prone to fraud than standard IRAs. However, as long as you consistently practice due diligence and work with credible custodians,  the benefits of a self-directed IRA far outweigh the potential risks.

How can I verify if an investment opportunity is legitimate?

You can verify the legitimacy of an investment opportunity by doing proper research. Check the investment promoter’s background, confirm asset legitimacy and consider consulting a financial professional before you proceed. If you feel something is off, it’s likely a good time to walk away and look for your next opportunity.

What role does a custodian play in preventing fraud?

A custodian holds assets and administers the IRA, but they are not responsible for verifying investments. As such, you must maintain due diligence for each investment opportunity. Still, you must always work with a verified custodian, as ill-meaning individuals or entities can present themselves as custodians.

Take Control – Safeguard Your Retirement Funds