The vast majority of investment salespeople are honest professionals. But there are a few bad apples in every industry. Alas, the Self-Directed IRA investment promotion business is no exception.
There are a few crooks who will say anything, and tell any lie they think you will believe, in order to get a sale. In the Self-Directed IRA industry, one of the most common lies they tell is this: The IRS “approves” this or that investment for use in Self-Directed IRA accounts.
This is false. The truth is that neither the IRS, nor any other federal agency, gets involved in deciding which investments are suitable or not suitable for IRA accounts, self-directed or otherwise. Congress sets forth a few restrictions on allowable IRA investments:
- No life insurance.
- No gems or jewelry.
- No gold or precious metal coins or bouillon unless it is of established and consistent purity.
- No collectibles, such as art or antiques.
- No alcoholic beverages.
- No direct transactions with spouses, ancestors, descendants or anyone who advises you on your retirement account as a fiduciary.
Beyond these specific restrictions, the IRS is neutral about what investments you have within Self-Directed IRAs. Anyone who tells you otherwise is likely trying to pull a fast one.
The truth is the IRS does not screen investments for IRA investors in any way. It does not review or approve any investments and makes no endorsements. Furthermore, it does not issue letters to the operators of any particular investment certifying compliance with IRA-related regulations.
Deciding what is a “good” investment for an IRA is solely the purview of the individual investor and his or her financial advisors.
So, if someone is pitching an investment to you and says the investment is “IRS-approved” or “government endorsed,” or any other words to that effect, think twice before you invest. This is a very common warning sign.
Watch for these other signs of Self-Directed IRA scams
The Internal Revenue Service has published a number of tips to help investors avoid common IRA scams and blunders. Among them:
- Beware of anyone claiming an investment promises “high-returns” with “no risk.”
- Do not invest solely on the basis of a TV or radio infomercial.
- Never transfer assets or control of assets directly to an investment promoter.
- Use extra caution during tax season. Scam IRA promoters are especially active during tax season, trying to take advantage of tax-conscious investors.
- Always check out a broker or promoter’s disciplinary history before investing money. You should check with both federal and state securities regulators. To find the number for your state’s securities regulator, go to the government listings section of your local telephone directory.
Exercise particular due diligence before investing in any general partnerships or LLCs. Both are permissible within Self-Directed IRAs. Forming your own LLC and using the LLC to hold assets within your 401(k) can be an excellent technique for some investors.
But a large number of scams or simple failed investments are formulated as general partnerships and LLCs, as well.
Additionally, the Security and Exchange Commission has also come out with a bulletin, containing a number of ways investors can prevent Self-Directed IRA-related fraud. These include:
- Verifying information in account statements
- Avoiding unsolicited investment offers
- Asking questions of the promoter
See the link for more details.
The primary responsibility for due diligence with all IRA investments lies with the investor, assisted by his or her legal and financial advisors, if any.
Similarly, as a third-party administrator for Self-Directed IRAs and other types of tax-advantaged accounts, American IRA, LLC does not screen or endorse particular investments. All such investors should take care to do their own due diligence before investing.