With more baby boomers reaching retirement age, it’s natural that many are nervous that their retirement fund will be inadequate. As a result, some are moving to self-directed individual retirement accounts (IRAs) as a way to build their assets.
However, in so doing, they could be exposing themselves to fraud.
Unregistered IRAs, which currently represent a $100 billion market, give people the opportunity to invest outside the traditional stock market/bond market. Options include real estate, precious metals, private mortgages, private company stock, and cryptocurrencies.
However, because more and more people are investing in cryptocurrencies, they are also opening themselves up to scams.
As a result, the Securities and Exchange Commission has issued a new warning. In the August 8 Investor Alert, the SEC warns that it oversees traditional IRAs (stocks, bonds, and mutual funds) but has no oversight when it comes to self-directed IRAs.
The IRS does require that self-directed IRAs be set up by an authorized custodian, the custodian only holds and administers the digital assets. The IRS has nothing to do with validating the investment’s legitimacy.
While the SEC admits there hasn’t been a single incident that prompted the new warning, Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, told CNBC, “Now that some self-directed IRAs include digital assets – cryptocurrencies, coins and tokens, such as those offered in so-called initial coin offerings – we think it is important to alert investors about the potential risks and fraud involved with these kinds of investments that may not be registered.”
The Association of International Certified Professional Accountants has also issued a similar warning in its recent report, Eye on Fraud. The report state that the types of investments permitted within self-directed IRAs increase risks, including lack of disclosure, liquidity, as well as fraud and particularly elder abuse.
Scammers prey on easy targets, including the wealthy who are incentivized to invest or those exhibiting signs of loneliness or diminished cognitive ability.
Mary Mohr, executive director of the Retirement Industry Trust Association said RITA has been working with the North American Securities Administrators Association (NASAA) on anti-fraud initiatives since 2011.
Self-directed IRAs were created through the 1974 Employee Retirement Income Security Act. They are appealing to people who want to diversify their portfolios, and take full advantage of what is allowed by the IRS. “They want to invest in what they know and what they feel they have control over,” said Mohr. She said potential problems come up when some IRA owners believe that the custodian conducts due diligence on their investments, when in fact self-directed IRAs are strictly do-it-yourself.
Mohr said to be careful when a promoter says an investment is IRS-approved. The IRS does not approve any assets, and custodians don’t, either. Fast-moving changes in the investment world, including the rising popularity of cryptocurrencies, pose new and emerging threats. Cryptocurrencies are well known for significant price fluctuations. A scammer is not responsible for the market’s volatility, but may encourage quick and impulsive actions to the detriment of the investors.
Ultimately, there is no substitute for good old fashioned homework when it comes to being a discerning investor intent on growing a retirement portfolio, especially in the cryptocurrency space.