There is a lot of misinformation out there about self-directed IRAs. Some people mistakenly believe that self-directed IRAs are a different type of legal structure from Roth or Traditional IRAs. In truth, a self-directed IRA is legally identical to a traditional or Roth IRA (as a self-directed IRA can be set up to be either type) – the difference with a self-directed IRA is that the account custodian will allow the owner to invest in all asset types that are permitted by law, rather than limiting them to things like stocks, bonds and mutual funds.
Unfortunately, this misinformation sometimes leads to confusion, and that makes it easier for fraudsters to take advantage of individuals who don’t understand what self-directed IRAs are all about. Here are some of the other myths surrounding self-directed IRAs, as well as tips for guarding yourself against fraud.
Does a Potential Investment Itself Seem Suspect? There are instances where the prestige and familiarity of the IRA structure has been used by fraudsters to lend credibility and authority to an otherwise questionable investment scheme.
Beware of any investment opportunity in which someone is trying to steer you to set up a new self-directed IRA with a specific custodian, and discourages you from using an account you’ve already created or from setting up a new account with a more experienced custodian. While custodians of self-directed IRAs are not responsible for providing investment advice or evaluating the risks of a particular investment that you might be interested in, you need to be extra careful with those who are promoted in connection with a questionable investment.
Does the Investment Benefit You Now? Unfortunately, one common approach that scam artists use to get people to enter into fraudulent transactions with their self-directed IRAs is clearly prohibited by law.
The IRS rules and regulations unequivocally prohibit individuals from “self-dealing” with their IRA assets. This means that the account owner (as well as their family and other related parties) are prohibited from receiving any benefit from those IRA assets without taking a distribution from the account (and paying any taxes or penalties that may be due on that distribution).
Most individuals understand that this means you can’t receive any income generated from IRA account assets. But it also means that you can’t use any of those assets yourself, even if you’re behaving in the same way an unrelated party would. For example, if your self-directed IRA owns a timeshare or other vacation property, neither you nor any related parties can use the property, even if you pay the going rental rate back into the IRA.
Because being able to purchase property with retirement assets and then use it yourself sounds like such an attractive thing, scammers will use this approach (often through a questionable and convoluted self-directed IRA structure) to try to get you to enter into investment transactions that could cause you problems many years down the line.