Are Self-Directed IRAs Too Good to be True?
Earlier this month, USA Today personal finance columnist John Waggoner posed the question: Are self-directed IRAs too good to be true?
His answer, and mine: generally, yes.
Famous for their flexibility, which allows individuals to invest in anything from office buildings to unregistered securities or small businesses, this new breed of individual retirement account also poses significant risks for investors – especially the risk of investment fraud.
Specifically, the products pose the risk of:
Misrepresentations regarding custodial responsibilities;
• Misrepresentations about material facts, including “guaranteed returns;”
• Exploitation of tax-deterred account characteristics; and
• Lack of information for alternative investments.
They also open the door to Ponzi schemers, con men, and other scammers who convince investors to move their retirement savings from traditional IRAs into self-directed IRAs and then misappropriate the funds. As Waggoner stated in his column: “Some investments don't deserve your money just because they're there. If you're not willing to spend time checking [out] a self-directed IRA, don't do it [invest].”
Ways to check the legitimacy of a self-directed IRA can be found in the 2011 investor alert issued by the SEC and the NASAA. (Click here to download the alert.) For additional information, read Waggoner’s entire July 12 article online.