Self Directed IRAs

During boom times, when people feel like they can do no wrong investment wise, fraudsters are hard at work looking for ways to separate investors from their funds. With Americans busy saving for retirement, fraudsters face obstacles persuading soon to be retirees to move money out of qualified retirement plans like IRAs and 410ks, for fear of getting hit with massive taxes and penalties.

As a result, a whole industry has sprung up to take advantage of lax IRS rules (and, ostensibly, to give investors more choices on how to invest their retirement funds.) The self-directed IRA permits people with retirement accounts to make investments that might otherwise be unavailable at traditional investment firms and broker dealers. Tax liens, rehab ready urban real estate, promissory notes and unregistered securities issued by startup companies are the kinds of investments that John and Jane Retiree can purchase with their precious, irreplaceable retirement savings.

These same investors are generally unaware that the self-directed IRA Custodians that the fraudsters recommend to “hold” their investment funds do nothing of the sort. The Custodians merely clear the transaction and report a value (often wildly inaccurate) to the IRS once a year to give the illusion that the funds remain safe inside a qualified retirement account.

In reality, the self-directed IRA Custodian doesn’t retain custody of the funds for more than an instant. After committing to the investment, the investor opens a self-directed IRA account and has his or her retirement funds wired to the self-directed IRA custodian. In the time it takes to hit the send button on a keyboard, funds that took ten or twenty years to accumulate are irretrievably lost to fraud.

After being journaled as received, the self-directed IRA Custodian wires the funds to the fraudster “at the direction” of the investor. What is left is usually some worthless piece of paper in the form of a promissory note, stock certificate or other legally binding document evidencing the swindle.

Many investors mistakenly believe that the self-directed IRA Custodian performs due diligence into the investment, and supervises the fraudster selling the investment. In reality, the self-directed IRA Custodian passes no judgment on either the investment or the seller. Aware of this legal blind spot, a whole industry of disbarred stockbrokers and crooks has sprung up to promote the self-directed IRA as giving investors more “freedom and choice” to use their retirement funds “as they see fit.” What isn’t disclosed is that these same crooks aren’t licensed to sell traditional investments like stocks, bonds and mutual funds as a result of regulatory censors and bans. As a result they gravitate to unregistered securities and other “nontraditional investments” because they aren’t licensed to sell anything else. These crooks then tout the financial strength of the self-directed IRA Custodians which are oftentimes trust companies that give an air of legitimacy to the scheme.

Self-directed IRA Custodians are not obligated to perform due diligence of the kind required of FINRA licensed firms. In fact most self-directed IRA Custodians specifically disclaim any due diligence responsibility, and state that the investor is solely responsible for making the investment decisions. In other words, an “only following orders defense.” Investors are unaware of this because these types of disclosures are usually buried on page 13 of 17 pages of disclosures, and aren’t explained by the unregistered brokers as part of the sales pitch.

Investors should always run a FINRA’s broker check search to make sure the person they are relying on for financial advice is licensed, and doesn’t have an inordinate number of customer complaints on his or her record. And, in this day and age, failing to perform an internet search on the person looking to separate you from your retirement nest egg, as well as the principals behind the deal, is simply inconsistent with responsible practices.