For whom are self-directed IRAs risky? With the growing popularity of self-directed IRAs, contrasting opinions for this investment method surfaced over the past few years. The notice of the SEC regarding the risk of fraud in self-directed IRAs in 2011 started the conversation about the safety of investing in this type of IRAs. Brian Ellis, the CEO of the private association of affluent investors in real estate, private equity and alternative assets, Self-Directed Investor Society, offered an answer to this question in this Forbes article.
Should You Stay Away From Self-Directed IRAs?
In 2011, when the SEC published a notice concerning the risk of fraud in self-directed IRAs, conventional financial professionals were quick to choose sides… Is there a risk of loss in self-directed IRAs through fraud?
Brian Ellis was quick to respond that of course there is. He argues that this is true with almost every investment there is.
The Backlash for Self-Directed IRAs; Ellis’ Come Back
— Americanirasocial (@AmericanIRA) August 30, 2017
The two most common arguments conventional financial advisers present to investors to dissuade them of self-directed IRAs investments, according to Ellis, are that self-directed IRAs investments are a gateway to fraudulent schemes and are too complex.
On the first argument, the CEO linked this dissuasion to a “vested interest in keeping Americans narrowly focused on the retail assets offered by Wall Street rather than considering any competitive alternatives, such as real estate, precious metals or privately-owned businesses.”
While it is true that there are growing cases of self-directed IRAs investment frauds, legal victories like that of Equity Trust that Ellis cited are a testament that self-directed IRAs aren’t innately harmful. In fact as what the SEC notice said, “self-directed IRAs can be a safe way to invest retirement funds.”
For the latter argument, Ellis pointed out while the risks entailed with self-directed IRAs, such as costly tax penalties conventional experts emphasize, are true, these said experts’ expertise long ended before the rules concerning self-directed IRAs began. Furthermore, he also stressed that the “unique complexities” (leveraged investments, unrelated business income tax, and asset valuations) of self-directed IRAs as what a wealth adviser points out in this article are exactly linked to alternative asset investing through self-directed IRAs. These same complexities, according to Ellis, are what makes the extraordinary potential in investing through self-directed IRAs unique.
Self-directed IRAs offer more investment options like real estate, mortgages, tax liens, precious metals, and private placement securities. Fraudsters exploit this investment versatility and the limited investor-custodian relationship of these accounts.
Perpetrators tend to misrepresent responsibilities of self-directed IRAs custodians to mislead investors into believing that they’re almost immune to losses. Most of the time they make investors believe that custodians assess and investigate investments in self-directed IRAs. In reality, custodians do not. In fact, they have zero responsibility for investment performance.
Always stay critical when presented with investment opportunities. Always do due diligence. A simple online check can be a start. While we all want to grow our savings through investing, this same desire is what fraudsters use to lure us in their scams.
You can watch this video to get a more technical understanding of self-directed IRAs: