What Is a Self-Directed IRA and How Does It Differ From a Traditional IRA? - Transcript

Self-directed IRAs are appealing to many investors because they offer the flexibility to choose and manage a wide range of investments. However, this autonomy might come with significant risks, as investors bear sole responsibility for their investment decisions. At Malecki Law, we help investors understand the unique characteristics and risks of self-directed IRAs, particularly when they encounter fraudulent schemes or investments that are not in their best interest.

A self-directed IRA is a type of retirement account that allows investors to hold a broader array of assets than traditional IRAs, including:

• Real estate
• Private equity
• Precious metals
• Promissory notes
• Cryptocurrency

Unlike traditional IRAs, which are typically limited to stocks, bonds, mutual funds, and other publicly traded securities, self-directed IRAs offer access to alternative investments. However, this flexibility comes with critical differences in oversight and risk.

The main differences between self-directed IRAs and traditional IRAs lie in the level of oversight and the types of investments available:

1. Custodial Oversight:
   • Traditional IRAs: Managed by custodians such as brokerage firms, which perform due diligence on investments and ensure compliance with regulatory standards.
   • Self-Directed IRAs: Managed by custodians who provide administrative services but do not vet or approve investments. Investors are generally solely responsible for the due diligence and risk assessment of their chosen assets.
2. Investment Options:
   • Traditional IRAs: Limited to publicly traded securities, which are subject to regulatory scrutiny and market transparency.
   • Self-Directed IRAs: Include alternative investments that may lack regulatory oversight, transparency, and liquidity.
3. Responsibility for Investment Decisions:
   • Traditional IRAs: Brokers or advisors often guide investment decisions, providing a layer of professional oversight.
   • Self-Directed IRAs: Investors make all decisions independently, increasing the potential for mistakes or exposure to fraudulent schemes.

While self-directed IRAs offer flexibility, they also pose unique risks, including:

1. Fraud and Ponzi Schemes:
   Self-directed IRAs are a frequent target for Ponzi schemes and other fraudulent investments. Scammers often exploit the lack of oversight to market unregistered securities or fictitious investment opportunities.
2. Lack of Due Diligence:
   Custodians for self-directed IRAs do not verify the legitimacy or quality of investments. This means that investors must conduct their own research, which can be challenging for complex or opaque assets.
3. Limited Recourse for Losses:
   Without a broker or financial advisor involved, it can be difficult to hold any party accountable for losses. Custodians generally disclaim responsibility for investment outcomes, leaving investors with limited options for recovery.
4. Compliance Risks:
   Certain investments may inadvertently trigger prohibited transactions under IRS rules, leading to tax penalties and other consequences.

At Malecki Law, we assist investors in assessing the risks of self-directed IRAs and provide guidance when losses occur due to fraud or other misconduct.

Recovering losses in a self-directed IRA can be challenging, but there are circumstances where liability may arise:

• Fraud by Third Parties: If a fraudulent investment was marketed or sold to you by a third party, you may have a claim against the promoter or issuer of the investment.
• Misconduct by Custodians: While custodians generally have limited responsibilities, they can be held accountable if they knowingly participate in fraudulent schemes or fail to follow specific legal obligations.
• Involvement of Advisors: If a broker or advisor recommended the investment, you may be able to pursue claims for recommendations against your best interest or breaches of fiduciary duty.

Our team at Malecki Law has experience handling cases involving self-directed IRAs, including pursuing claims against third parties responsible for fraud or misconduct.

Investing through a self-directed IRA requires careful due diligence and awareness of potential risks. Steps to protect yourself include:

1. Research Investments Thoroughly: Verify the legitimacy of the investment and the track record of its promoters.
2. Be Skeptical of Guarantees: Avoid investments that promise high returns with little or no risk.
3. Consult Professionals: Seek advice from independent financial advisors or attorneys to evaluate complex or unfamiliar investments.
4. Monitor Accounts Closely: Regularly review your account statements and investigate any discrepancies or suspicious activity.

If you suspect fraud or other misconduct involving your self-directed IRA, consult an experienced securities lawyer immediately to explore your options.

Self-directed IRAs offer exciting opportunities but also come with significant risks. If you’ve experienced losses due to fraud or unsuitable investments, Malecki Law is here to help. Our experienced securities lawyers are dedicated to protecting investors and pursuing justice in cases involving self-directed IRAs. If you have questions for an experienced securities lawyer, reach out to Malecki Law to schedule a free consultation by calling 212-943-1233. We value your privacy and will ensure all communications remain confidential. Malecki Law is based in New York and represents clients across the world.

Transcript:

Self-directed IRAs sounds really great because you can take your money and do whatever you want with it the problem is you can take your money and do whatever you want with it within this IRA account so the problem is as it’s titled self-directed it means you’re responsible for everything that happens there there’s no failure to supervise case because there’s no supervisor there’s no broker unless there are some circumstances that wrongdoing can happen in a self-directed IRA but if no one recommends an investment to you and you happen to get into guess what a Ponzi scheme often show up in self-directed IRAs you know you’re going to find it hard to find a deep pocket that’s going to be responsible for what you did in your self-directed IRA nothing’s vetted there’s no due diligence done by the custodian.