SEC IRA Investor Alert Also Applies to Solo 401k Plans

In September 2011 the Securities and Exchange Commission (SEC) issued an “Investor Alert” warning investors to be wary of fraudulent promoters targeting self-directed IRA funds. While this alert only mentions self-directed IRAs, the items mentioned in the alert should also be reviewed by self-directed solo 401k investors that invest their funds in alternative investments such as real estate, promissory notes, tax lien certificates, and private placement securities. The SEC alert probably did not reference solo 401k plans because they did not become popular until 2012 and IRAs hold a lot more funds because you are not required to be self-employed to open a self-directed IRA.

Key Items Mentioned in the 2011 SEC Investment Alert

  • Self-directed IRA accounts allow IRA owners to invest their retirement funds in other types of assets such as real estate, promissory notes, tax lien certificates, and private placement securities.
  • Fraud promoters may try to exaggerate the responsibilities of a self-directed IRA custodian by saying their investment has been approved or somehow verified by the custodian. This, however, is generally not the case and many self-directed IRA custodial agreements explicitly state that the custodian bears no responsibility with regards to any investment held in an account.
  • Since retirement money including self-directed solo 401k plans is typically looked at as long-term money and in many cases, may not be accessed for some time, investors are less likely to pay as much attention to these investments as they might to other investments they intend to access sooner. Fraud promoters may try to exploit this diminished oversight.
  • The alternative investments that are frequently held in self-directed IRAs often do not have the same level of independently verified financial information that publicly traded securities have. This can make distinguishing between legitimate and fraudulent investments more difficult.
  • Clients should be aware of investments that promise high returns with minimal risk. If it sounds too good to be true, it probably is.
  • Clients should be skeptical of unsolicited investment advice, such as the investment recommendation of a co-worker, friend or even a family member.
  • Asking questions, consulting with a knowledgeable professional and independently verifying the financial information on a self-directed IRA statement can all help minimize the potential for fraud.
  • A fraudulent investment made via a self-directed Roth IRA can be a double dagger. Not only can a client lose their investment, they may be unable to get back the tax they paid when they contributed/converted funds to the Roth IRA.
  • Those who are considering investing in a self-directed IRA should make sure they are aware of the unique challenges a self-directed IRA can potentially create, as well as the possibility of being targeted by promoters of fraudulent investments

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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