Millions of Americans have benefited from Self-Directed IRAs. The tremendous flexibility that Self-Directed IRA strategies offer have enabled many of our clients to take advantage of their own expertise and increase returns, lower risk, or both, over the years, through all kinds of unconventional investments, thanks to Self-Directed IRAs.
That said, unfortunately there are a few unscrupulous individuals out there who seek to take advantage of novices or unsophisticated investors by muddying the waters about what a Self-Directed IRA is or is not, and how Self-Directed IRAs work.
Here are a few things you should know to protect yourself from those seeking to rip you off through their own dishonesty or incompetence.
- The Internal Revenue Service does not “review” or “approve” IRA investments in advance. If someone hawking an investment refers you to any language saying the IRS has approved or reviewed a particular investment, view that as a red flag. Some sloppy language may refer to broad asset classes as being IRA-approved – such as real estate, in general. But the IRS is not in the business of reviewing or approving particular investments for use in IRAs. Don’t work with anyone trying to create that impression.
- The IRS certainly does not “endorse” any particular investment.
- The IRS does approve trustees and custodians who look after IRA assets and record transactions on behalf of the IRA owner. But the IRS does not issue statements that any particular investment in an IRA is protected from loss or has any other special status or privileges just because a given trustee or custodian has been approved by the IRS.
- Don’t make investments based purely on information gained from a radio or TV infomercial. Always do your own due diligence, or have a disinterested financial professional you trust help you with your due diligence.
- Watch for outrageous promissory language. While insurance products, such as annuities, do come with certain guarantees (subject to the continued solvency and claims-paying ability of the insurance company), investment products are not protected against risk. Beware of any investment being billed to you as “no risk,” “guaranteed” or offering projections much higher than other similar investments. If something seems too good to be true, as they say, it probably is.
- Do not rollover or transfer your Self-Directed IRA funds or any other retirement funds directly to the hands of an investment promoter or salesperson, personally.
- Annuities and other insurance products are guaranteed only by the insurance company itself – and to a very limited extent, state guaranty funds set up as an emergency backstop. Annuities don’t come with any other government guarantees or bank guarantees beyond these.
- Be careful with general partnership investments. While it is legal to invest in a general partnership within an IRA, the structure of general partnerships expose everything else in your IRA to the claims of all creditors of all the other partners.
- Keep educating yourself about IRAs, including Self-Directed IRAs, and other forms of retirement planning by reading this blog and other similar resources, as well as IRS publications.