Self-directed individual retirement accounts (IRAs) are becoming more popular as more people look for different ways to save for retirement.
A consumer alert from the Oregon Division of Financial Regulation says that self-directed IRAs give investors more control over their investments. Still, they also come with the risk of financial losses and risks (ODFR).
ODFR wants investors to be careful when thinking about self-directed IRAs. Self-directed IRAs may have the potential for higher returns, but they also come with more risks, such as the chance of being a victim of a scam, having to pay high fees, or having their value go up and down can cause you to lose money.
Investors can hold real estate, precious metals, private equity, and cryptocurrency in their retirement accounts with a self-directed IRA.
The ODFR says in a release that this flexibility can be appealing, but it also makes it possible for investors to face risks they might not fully understand. Self-directed IRA custodians do not evaluate the quality or legitimacy of any investment in the self-directed IRA or its promoters. Instead, that is the sole responsibility of the investor.
With a self-directed IRA, the account holder is the only one who needs to evaluate and understand the investments in the account.
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Due to federal laws and rules about selling investment products or providing investment advice, most custodians for other types of IRAs only allow stocks, bonds, mutual funds, and certificates of deposit approved by the firm. Self-directed IRAs, however, are not limited in this way.
Custodians of self-directed IRAs:
- DO NOT sell investments or give advice about investments.
- DO NOT judge the quality or legitimacy of any self-directed IRA investments or the people who sell them.
- DO NOT check if the financial information given for investment in the account is correct.
Self-directed IRA custodians are only responsible for keeping the assets in the account and ensuring they are taken care of. Also, most agreements between a self-directed IRA custodian and an investor clarify that the self-directed IRA custodian is not responsible for how the investments do.
One of the biggest risks of investing through self-directed IRAs is that fraud schemes are more likely to happen. Two examples are Ponzi schemes, in which newly invested money is used to pay other investors to hide that the investment isn’t making money and fake investments in assets that don’t exist.
The release says that investors may find it hard to protect themselves from scammers because the self-directed IRA space is not regulated and the self-directed IRA custodian does not do background checks.
Self-directed IRAs can come with high fees and the risk of fraud. These fees can be tied to the alternative assets or the people who hold them. Before putting money into a self-directed IRA, investors should carefully look at all the fees that come with it.
Below is a Twitter post from the Oregon DCBS saying about self-directed IRAs-
#OregonDFR is urging investors to use caution when considering self-directed IRAs. IRAs may offer the potential for higher returns, they also come with increased risks, including the possibility of volatile performance that can result in financial loss. https://t.co/NLgqUBgbMI pic.twitter.com/a59w53EuRH
— DCBS (@OregonDCBS) March 28, 2023
The value of alternative assets can be unpredictable, leading to a loss of money. Unlike stocks and bonds, alternative assets may not have a well-established market, making it hard to determine their real value. So, investors might be left with assets that are hard to sell or have lost value over time.
“Self-directed IRAs can be a useful tool for certain investors, but it’s important to understand the risks involved,” ODFR Administrator TK Keen said. “Investors should thoroughly research any alternative assets they plan to hold within their IRA and carefully review all fees associated with their account.”
If an investor is thinking about a self-directed IRA, they should talk to a licensed financial advisor who can help them weigh the risks and possible rewards. Investors can help protect themselves from possible financial losses by being careful and well-informed when they invest.
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