With over 12 trillion dollars in assets at stake for 60 million IRA account holders, it’s no wonder that these retirement accounts are popular targets for fraudsters and scammers. Self-directed IRA (SDIRA) account holders are responsible for directing their own accounts and conducting their due diligence on investment options. This is why being vigilant when it comes to fraud or other possible scams is of the utmost importance.
Since the 1970s, investors have been able to leverage alternative investments through their tax-advantaged SDIRA. Part of doing due diligence requires investors to conduct careful planning and find educational resources when making investment decisions. This article will cover the steps you can take as an investor to protect your self-directed IRA from fraudulent scams and what projections are in place for victims of SDIRA frauds or scams.
Here are several ways you can protect your self-directed IRA against fraud and abuse.
Vet Your Investments Carefully
Ultimately, an SDIRA puts investors in the driver’s seat. Having ultimate freedom to control and direct your IRA assets means having to carefully choose and evaluate what you decide to invest in— not only for their potential return but for validity as well.
To reduce the risk of fraud, when you are researching possible IRA investments, there are a few tips to keep in mind for asset protection.
- Watch out for unsolicited investments, especially ones that seem too good to be true. An investment promising high returns for a low-risk endeavor could be a red flag alerting you to a possible scam.
- You’ll want to be sure to read the fine print. For instance, any language implying that the IRS approves an investment should sound the alarm as the IRS does not endorse investments.
- Never move too much money at one time. If an investment opportunity asks for you to transfer all of your money upfront to a single product or person, proceed with extreme caution.
- Don't invest in what you don't understand. For example, just because someone you know is investing in crypto currency with IRA funds, it doesn't necessarily mean it's a good investment. Educate yourself on the structure of the deal before moving forward.
These strategies are commonly used by fraudsters to swindle investors out of their retirement savings. Additionally, you’ll want to be sure to check your SDIRA account statement regularly for suspicious activity when managing the investments in your account. Lastly, trust your gut feeling, and don’t be afraid to ask questions for further clarification.
Remember, you hold the reins on this account. If an investment feels off, you always have the option to walk away or request more information before committing to an alternative asset. Use our guide to due diligence for self-directed IRA investors as a point of reference when selecting a secured investment.
Choose a Reputable Self-Directed IRA Custodian
You will conduct your self-directed IRA transactions through an IRA custodian — an entity or company that provides custody and administration of self-directed retirement plans. SDIRA custodians must be compliant with state and federal law requirements.
When choosing a company for your SDIRA, look into how long they’ve been offering SDIRAs, staff credentials, and reviews from SDIRA account holders.
A red flag to look out for here is any SDIRA provider who claims to be able to find investments for you or protect your investments against losses. Remember, custodians cannot do due diligence for or advise about investments.
Another thing to research is if you really need an IRA LLC. Some IRA Custodians are in the business of creating LLCs and require that you create one. Make sure that you know when one is truly needed or not.
A green flag would be to look for SDIRA custodians that provide investors with educational resources, like in IRAR’s Knowledge Center, to make sure their clients understand the risks and benefits of an SDIRA.
Familiarize Yourself with SDIRA Rules and Regulations
Knowing the ins and outs of the rules and regulations when it comes to managing a self-directed account is a fundamental part of the investment process. Unfamiliarity with the rules and regulations can make you more vulnerable when it comes to fraudulent investment scams and attacks.
Being able to assess investments when managing your portfolio is essential and can make sure you stay tuned in to potential fraudulent activity. Check out IRAR’s guide to Self-Directed IRA Rules, Requirements, and Prohibited Transactions when doing your research.
Consult with Trustworthy Financial and Legal Advisors
The team you choose matters when it comes to devising an optimal investment strategy. Be sure to consult with credible financial and legal advisors whose prerogative is to get you on the right path toward your long-term retirement goals.
Determine whether or not the advisors have your best interests in mind as who you choose may significantly impact your retirement strategy. You may want to select financial and legal representatives that have fiduciary responsibility. A fiduciary is obligated to act in your best interest versus trying to sell you a financial product.
Research and obtain references before moving forward with any investment decisions from a new or unfamiliar advisor. Remember, some advisors only offer stock or bonds because of their familiarity with the stock market. Alternative assets in IRAs may be something that they don't want to offer— leading you to believe they're not allowed.
Stay on top of managing your portfolio. Ask questions and follow your own instincts or expertise.
Finally, there are some common house rules when it comes to investing to protect yourself from financial manipulation. This especially rings true for elderly populations who can be more susceptible to fraud and scams.
- Never share sensitive information about your identity with an untrusted source
- Be alert to any possible stolen financial documents
- Be wary of financial neglect and exploitation that can manifest in the form of mismanaged bills and expenses
Ultimately, regular monitoring and an awareness of the rules and regulations combined with your investment research should help keep you protected against SDIRA fraud and scams.
Common Self-Directed IRA Frauds & Scams
Since 2019, the number of suspected fraud cases surrounding self-directed IRAs has nearly doubled each year. Here are some of the most current fraud scams reported by state securities regulators:
- Facilitating a fake custodial trust. Certain scam perpetrators purport to set up their own IRA custodians to aid and abet their scams. In some cases, the scammers will target an open IRA through an established trust company, luring investors into a false sense of security through impersonation. This can result in the self-directed IRA scammer taking money for non-existent investments. In another case, the scammer may sell real gold or alternative assets to the IRA at a highly-inflated price or excessive transaction fees will be charged. In either scenario, the fraudster receives funds from the IRAs in exchange for nonexistent or overpriced investments.
- Offering fake or illegitimate investments. Promissory notes, precious metals, other commodities, and real estate are investment types that are frequently subject to scams as well as mortgages and tax liens. With the rise in popularity of cryptocurrencies, digital scams are also popping up in response. In fact, state securities officials say scams involving digital media more than tripled in 2021. Many of these scams are executed using social media to build impressive fake identities that put investors at ease, making them prone to wiring fraud and lending with their self-directed IRA.
What to Do if you are a Victim of Self-Directed IRA Fraud
It’s natural to wonder: is a self-directed IRA protected? Are self-directed IRAs FDIC insured? The reason it is imperative for investors to thoroughly know the details of the investment and actors involved on the other side of the transaction is that there’s no extra level of protection in a self-directed IRA for the investor. Your best shot in a case of fraud would be to contact the SEC or your state securities administrator. Sometimes private legal recourse is an option.
The FDIC only backs cash-leaning assets, like checking and savings accounts, CDs, and money market accounts in your self-directed IRA. Other alternative assets like precious metals, crypto, and real estate investments are not insured by the FDIC against loss.
That’s why ultimately, the best strategies for protecting yourself from self-directed IRA scams are the same as for other scams: do your due diligence and consult with trusted advisors before committing to any major financial investment or transaction.
How Can IRAR Help?
IRAR has helped investors navigate their self-directed, tax-advantaged individual retirement accounts for nearly 30 years. Our mission is to empower people to build wealth through alternative investments at a lower cost. We help our clients plan for a future of financial freedom by providing stellar recordkeeping, individualized service, and educational resources so they can choose investments that help them meet their goals.
Find out more about how we can help you plan for a better, less expensive way to save for retirement. Book a free consultation with one of our experts today to relish in the future of your financial freedom.