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The Risk of Fraud With Self-Directed IRAs

fraud-wordWhen it comes to investing with your self-directed IRA, the rules of the game can be tricky.

As NASAA has noted, fraudulent investments that use self-directed IRAs are a common occurrence. If you are planning on investing using your self-directed IRA, there are certain steps that you can take to avoid being defrauded by others. Furthermore, there are ways to minimize your risk of accidentally abusing your own self-directed IRA. The consequences for fraud and self-directed IRA abuse are very serious, but with these tips you can keep your self-directed IRA safe.

Fraud on the Rise

In 2012, NASAA began to notice a rise in complaints against investors who had been investing fraudulently with their self-directed IRAs. These issues involved both situations in which the investor him or herself used a self-directed IRA for a fraudulent scheme and situations in which the investor was led astray by another company or person who then invested their self-directed IRA in a fraudulent scheme. Because self-directed IRAs have complicated rules and regulations, they are an easy target for fraud as well as simple to accidentally abuse.

There are a few different ways that those who promote fraudulent investment schemes can target IRAs. First, they can misrepresent the duties that the custodian of the self-directed IRA has in the investment. This will cause investors to assume their investments are safe when they are not. Second, fraud promoters can exploit the fact that self-directed IRAs are tax-deferred and keep them invested in the fraudulent scheme for longer. Finally, they can also provide little information about alternative investments to take advantage of an investor.

Avoiding Being Defrauded

To avoid being defrauded, there are a few key factors to watch out for. First, you should always ensure that your investments are FDIC insured. Second, watch out for promoters who state that they will hold your funds. An independent trustee should be in charge of your funds instead. Third, find out if your investments are illiquid and if there are penalties for early withdrawal of your money. You should also always check the background of any investment promoter and ensure that they are licensed. Ask how much the promoter is making off of your investment in terms of flat fees, management fees, and commission. Finally, always evaluate the risks and benefits of your investments.

Avoiding Accidental Abuses

With the potential for accidental abuse of your self-directed IRA, you should also follow these tips to avoid such issues. Most importantly, your custodian should always stick to the rules set down by the IRS. You should also avoid checkbook features in self-directed IRA accounts, as these are prohibited. Holding your own self-directed IRA assets is also prohibited, and these should be sent to your custodian. Next, remember that the IRS has a ban on both self-dealing and earning any indirect benefits. Do not purchase investments that are prohibited, either. Finally, you should be careful when using your self-directed IRA’s leverage, as this has specific restrictions.

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