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Self-Directed IRAs and Fraud 


Unlike most IRAs, a self-directed IRA is held by a custodian that often allows investments in a wide variety of alternative investments such as real estate, tax liens, precious metals and private placement securities. Investors should understand that the custodians of self-directed IRAs may have limited duties to investors and generally will not evaluate the quality or legitimacy of an investment and its promoters.

While self-directed IRAs can provide a variety of investment choices, the Commission's Securities Division has observed assets in these accounts being lost through investment schemes. There are a number of ways that unscrupulous promoters may use self-directed IRAs to perpetrate a fraud on unsuspecting investors. For example, the promoter may:

  • Misrepresent that self-directed IRA custodians investigate and validate any investment in the IRA;

     

  • Exploit the investor’s fear of incurring a penalty and taxes due for early withdrawal of IRA assets thereby ensuring the scam continues without interruption;

     

  • Take advantage of the investor’s infrequent oversight since investments are typically held for the long-term; and

     

  • Capitalize on the lack of public information and absence of audited financial requirements typical of alternative investments.

     

For more general information about wise investing and fraud prevention, visit the Investor Resource Library, General A to Z.