For many years, the IRA (or Individual Retirement Account) has been viewed as one of the smartest possible investments for those looking to secure their retirement. IRAs allow individuals to put money away for their future with tax benefits that can either be realized at the time that the investment is made or when the funds are withdrawn in the retirement years. IRAs are available through most financial institutions, which offer a wide range of choices as to what types of instruments are available. These choices are at the direction of the institution’s fund managers, and generally offer the traditional stocks, mutual funds or certificates of deposit. In recent years, traditional IRAs have come under some criticism for being too limited in scope, and self directed IRAs have been capturing the attention of retirement investors looking for ways to have more control. Self Directed IRA LLCs are great financial vehicles for those who want to put their retirement in their own hands, but with that comes the need to be more weary of what investments they choose and who they choose to produce their self-directed IRA.

Self-directed IRAs offer all of the tax incentives and benefits that non self-directed IRAs do, but with self-directed IRAs the owner of the account has the ability to determine what commodities and holding they would like to invest in and are allowed to go farther afield. This allows for more flexibility and the addition of a broader range of options, including investments in real estate, mortgages, and private stocks in addition to the more traditional choices. These options are seen as offering greater opportunity in terms of growth while still providing tax benefits, which can hold tremendous appeal for those who are looking for a greater return. But they can also have greater risks associated with them, particularly as they are not regulated in the same way that stocks and bonds are.

In addition to concerns about the increased risk that self-directed IRAs carry, they also have come under additional media scrutiny recently because they offer an opportunity for unscrupulous marketers to take advantage of uneducated buyers looking to make up for lost time. Self-directed IRAs are completely legal and legitimate forms of investment that allow for greater diversification, and investors who do their due diligence should feel perfectly secure, as long as they follow a few simple rules:

Beware of Guarantees on IRA Income

Any investment group that offers you a guaranteed return on an investment product that you can purchase through a self-directed IRA is automatically suspect. If a promoter is telling you that an investment is a “guaranteed” return, you may want to consider this a red flag and do a bit more digging.

Understand the Custodian’s Responsibility in a Self-Directed IRA

A common way that fraudulent promoters take advantage of self-directed IRA investors is by exploiting investors’ lack of understanding of the custodian’s responsibility. The custodian in a self-directed IRA is under no obligation, bears no responsibility and makes no claims about the investments that the account owner chooses. No investigation is done as to the legitimacy of an investment: they are only responsible for the administration of the account and for holding the funds. If a promoter tells you that the custodian of an account has vetted an investment or is there to act as a failsafe, this is highly questionable and the investment bears further investigation. The custodian of the account is under no obligation to make sure that your money is still there.

Get a Second Opinion on your IRA Investments

Unless you yourself are an experienced financial advisor, it never hurts to ask for outside help from somebody with more information. Contact the SEC or other unbiased party and find out whether there have been any complaints against a promoter of an investment, particularly if they have approached you and solicited you rather than you contacting them. It is always a good idea to ask for references from other clients who have been with the investment for a while, or to do a quick Google search of a company to see whether there are any online conversations or complaints about them. Finally, see whether the company is actually making any transactions… whether a real estate investment or a private stock, there should be activity that you can detect.

Find out who is holding the Funds

The funds invested in a self-directed IRA are supposed to be held by the IRA administrator or custodian. If the funds for a particular investment are being held by the promoter, that is cause for immediate concern. The administrator for a self-directed IRA is required to be licensed, and is usually a bank or trust company. In some cases a custodian may be what is known as a TPA, or third party administrator, but in all cases you should verify that they are licensed by contacting the department of banking for the state in which it is licensed and ensuring that your funds are going to them rather than the investment promoter.

Self-directed IRAs offer a lot of advantages for investors who take the time to investigate the wide array of investments that are available to them, and who understand the various implications and rules that they involve. But as is always the case, caution must be exercised and if something sounds too good to be true, then it probably is. If you suspect that you have been fooled into participating in a Ponzi scheme or other fraud by an unscrupulous promoter, you should contact the Securities and Exchange Commission’s Complaint Center immediately for assistance, as well as the securities administrator for your state. If everything mentioned above is clear, however, that’s a great indicator that everything will go well in your self-directed IRA process.