The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to warn investors of risks associated with self-directed Individual Retirement Accounts (self-directed IRAs).
Self-directed IRAs allow investment in a broader—and potentially riskier—portfolio of assets than other types of IRAs. While a broader set of investment options may have appeal, investors should be mindful that investments in self-directed IRAs raise risks including fraudulent schemes, high fees, and volatile performance.
Investing through Self-Directed IRAs
An Individual Retirement Account (IRA) provides investors with certain tax benefits for retirement savings. Some common examples of IRAs include the traditional IRA, Roth IRA, Simplified Employee Pension (SEP) IRA, and Savings Incentive Match Plan for Employees (SIMPLE) IRA. All IRA accounts are held for investors by custodians. Custodians may include banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) to act as an IRA custodian. Most IRA custodians limit the holdings in IRA accounts to firm-approved stocks, bonds, mutual funds, and CDs.
A self-directed IRA is an IRA held by a custodian that allows investment in a broader set of assets than is permitted by most IRA custodians. Custodians for self-directed IRAs disclaim most duties to investors, and may allow investors to invest retirement funds in “alternative assets” such as real estate, promissory notes, tax lien certificates, and private placement securities. Investments in these kinds of assets may have unique risks that investors should consider. Those risks can include a lack of disclosure and liquidity — as well as the risk of fraud.
Certain self-directed IRAs allow investment in so-called “digital assets,” which include crypto-currencies, coins, and tokens, such as those offered in so-called initial coin offerings (ICOs). Fraudsters may use the allure associated with ICOs and other digital assets to entice self-directed IRA investors with the promise of high returns.
While it is possible that digital assets may provide fair and lawful investment opportunities, they may also be conducted without SEC registration or a valid exemption from registration, and may not provide complete or accurate information to aid investors in making informed decisions. In addition, many of the trading platforms for these digital assets refer to themselves as “exchanges,” which may give investors the misimpression that they are regulated by the SEC. For more information on the risks associated with ICOs and other digital assets, please check out our Spotlight Page on Initial Coin Offerings and Digital Assets. For more information on the risks associated with trading platforms for digital assets, please check out the Divisions of Enforcement and Trading Markets’ “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets.”
Self-Directed IRAs and the Risk of Fraud
Fraudsters may be more likely to exploit self-directed IRAs because custodians or trustees of these accounts may offer only limited protections. Custodians and trustees typically have only limited duties to investigate the assets or the background of the promoter.
There are a number of ways that fraudsters may try to use self-directed IRAs to perpetrate a fraud on unsuspecting investors. For example:
Ways to Avoid Fraud with Self-Directed IRAs
Despite the risks presented by self-directed IRAs, there are a number of steps that investors can take to reduce the risk of fraud.
Recourse for Fraud Victims
If you have lost money in a fraudulent investment or scheme involving a self-directed IRA or a third-party custodian, or have information about one of these scams, you should:
You also can read our Investor Bulletin: How Harmed Investors May Recover Money for general information on ways victims may recover money from fraudulent scams.
Additional Information
For additional educational information for investors, see the SEC’s Investor.gov website. For additional information related to avoiding fraud, also see:
For additional information regarding IRAs, please see the Internal Revenue Service’s IRA Online Resource Guide.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.
WASHINGTON—The Office of the Comptroller of the Currency (OCC) today published its 2024 Annual Report.…
WASHINGTON—The Office of the Comptroller of the Currency (OCC) today released enforcement actions taken against…
WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned…
WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) is…
WASHINGTON — Today, the United States Department of the Treasury is imposing sanctions on four…
WASHINGTON – Today, the U.S. Department of the Treasury (Treasury) released a report following the issuance of…