How to Reduce the Risk of Fraud in Self-Directed IRAs

While the vast majority of people working with investors and advising them on their Self-Directed IRAs are up-front, well-meaning and honest people, there have been a few bad apples in this industry over the years, as well.

There is nothing illegal or shady about Self-Directed IRA investing itself: An IRA is simply an entity that owns the investment. Self-direction just means the client is taking more direct control of the investments. And IRA rules allow investors to invest in almost anything they want.

Here are a few ideas to help you steer clear of the land mines and avoid fraudsters:

  • Understand that you are responsible for your own due diligence in Self-Directed IRAs. Self-directed IRA investing is best suited for mature, experienced or knowledgeable investors. You don’t have to be Warren Buffett, and it’s not rocket science. Anyone who applies themselves can do well. But if you don’t know what a “dividend” is and you don’t know what “ROI” stands for, self-directed IRAs probably aren’t for you.

You should have the knowledge to conduct your own due diligence and make your own investment decisions.

  • Know the role of the Self-Directed IRA custodian. Some people trying to sell questionable or fraudulent investments may try to tell you, “Don’t worry. The custodian will protect you against losses,” or “The custodian has already done the due diligence and has found this investment to be legitimate.” These are in nearly all cases falsehoods and should raise a red flag. The custodian’s role in self-directed IRA investing is quite limited: All the custodian does is hold the assets on your behalf and conduct and record transactions pursuant to your instructions. Custodians do not evaluate or analyze self-directed IRA investments. That’s the investor’s job – together with his or her financial advisor.

American IRA, LLC does not attempt to replace your financial advisor and we do not attempt to substitute our judgment as to the worth of an investment for yours and your financial advisors. We do help ensure that your decisions and transactions are compliant with IRS rules and the law, but we do not attempt to value investments or determine suitability.

  • Understand the nature of illiquid investments and Self-Directed IRAs. Many times, Self-Directed IRA owners route their money into assets that are not regularly publicly traded – and there may not be a market that provides a real-world daily price for you to track. In some cases, the assigned valuation that you may see on a statement is little more than an educated guess. Often, no one can know for sure what your asset or property is worth until you actually try to sell it.

For this reason, the assets on your statement may be at variance with the value you can actually receive for it if you try to convert it into cash.

This isn’t necessarily a terrible thing. Investors pay a price for ready liquidity. Conversely, investors can potentially get a larger return, or better income from income generating assets, if they are willing to give up liquidity. The theoretical reasons for this are explained in any number of articles on the concept of the liquidity premium.

  • Get a second opinion. Especially for unsolicited investment offers, and offers from anyone who hasn’t taken a full fact-finder on your specific financial situation.

American IRA maintains an extensive library of information on Self-Directed IRAs at Of course, we are also very happy to answer any questions you may have directly at 866-7500(472). We look forward to working with you.