Are Self-Directed IRAs Too Good to Be True?

Just you can do something doesn't that you should. You may be perfectly of cross-breeding trout with electric eels, for example, but you probably shouldn't do it you're very angry at fishermen.

You can invest in a array of things via your individual retirement account, from the usual stocks, bonds and mutual funds. Office buildings? Sure. Small businesses? Check. Unregistered securities? Yep.

And you can invest in all of these self-directed IRAs. Should you? most people, no. But for a few people, it can sense.

An IRA is simply a tax-deferred retirement account, and has very to do with what you decide to put that account. You can have an IRA stuffed stocks or bulging bonds. You can't put most collectibles in an IRA, or whole life insurance, or subchapter S corporations. (You can have U.S. gold coins an IRA, but that's a story another day.)

A self-directed IRA allows you to invest in things than securities registered with state or federal . For example, you can use the assets a self-directed IRA to buy a rental property, or even as the payment for a mortgage a rental property.

There are restrictions, , on self-dealing: You can't rent the place to yourself, for example. And you must have a qualified third- custodian for the IRA.

Self-dealing restrictions investing in small businesses — especially proprietorships — are also complex, and you should see a tax lawyer you put IRA money into a small business. "Self-directed IRAs have helped fund thousands of small businesses that wouldn't be there," says Tom Anderson, president of Retirement Industry Trust Association, a trade group.

So. You can put many types of investments a self-directed IRA. What are the drawbacks?

The most obvious is while the IRA will shelter gains transactions inside the account, you'll lose other tax benefits. If lose money, you can't deduct your losses, and you won't get capital gains treatment profits when you withdrawals.

Another problem is sure you're putting your IRA in a good investment. Yes, owning an office building can be lucrative. Have you it before, and do you understand the deal?

You also need to know it's legit. Your IRA trustee won't check your investment you. It will just give you statements.

And this brings us to biggest problem with self-directed IRAs: the potential fraud. The Securities and Exchange Commission and North American Securities Administrators Association put an investor alert self-directed IRA fraud in September.

The alert for interesting, if sad, reading. The Missouri Securities Division, for example, orders against Stephen Gwin in 2007 misleading senior citizens into investing in unregistered securities self-directed IRAs he controlled. He sold them — what else? — free lunch seminars. In 2010, the SEC shut a Ponzi scheme that took $9.2 million self-directed IRAs.

Anderson points that the regulated securities industry has seen fraud, and that's true. The regulated securities industry is also larger.

"Self-directed IRAs aren't bad, aren't illegal," says Matt Kitzi, Missouri's Commissioner of Securities. But scams involving self-directed IRAs are more common, he says.

So if you are tempted by a self-directed IRA, wary. If someone offers guaranteed return, or a very high return, run. Avoid anyone pushes you to invest — or offers a free lunch, for that . Check the person offering the investment the SEC and your state securities administrator. And notify your securities administrator moment something seems awry: Your chances of getting money back in a scam decrease the minute.

Lots of people are looking for alternatives stocks, and that's understandable. But some investments don't deserve your money because they're there. If you're not willing to time checking a self-directed IRA, don't do it.


Adapted from: CNBC, July 13, 2012.