Self-Directed IRAs are ideal fraud targets

Help prevent nest-egg ripoffs

By L. Christopher Knight, CFE, CPA

christopher-knight-80x80   Fraud Spotlight: Analyses of lesser-known frauds

Most Americans are familiar with the various retirement plans available to them for their long-term futures. Perhaps you're one of the fortunate few who still have a pension with your employer that will pay benefits to you based on a specific formula determined by that benefit plan. Or maybe your company offers a contribution plan such as a 401(k) and may even offer an employer match. Still others may utilize Individual Retirement Accounts (IRA) such as the traditional version or Roth. However, I've left one out one lesser-known retirement vehicle: the Self-Directed IRA (SDIRA), which poses potential major fraud risks.



Larry and Eleanor Kotula, nearing retirement age, were well on their way to living out their golden years. (This case is fictitious but, sadly, all too accurate.) They did everything right. They raised two children and paid for their college educations, lived modestly and saved aggressively for retirement. They’d amassed more than $1 million in Larry’s employer-sponsored 401(k) plan and had paid for their home worth $250,000. Everything was looking well until the 2008 stock market plunge. Like many investors, they lost a significant sum of their nest egg and soured on the prospects of the financial markets. They began looking to find sources of more promising investment returns other than the stock market. They met Ron, a financial advisor and investment promoter, who steered them to an SDIRA.


Time for a short SDIRA primer. SDIRAs are tax-deferred IRAs that require their owners to make their own investment decisions and direct the purchases or sales of assets within their accounts. Investors in SDIRAs are generally able to purchase a greater array of investment assets, including real estate, precious metals and promissory notes. In other words, SDIRAs are constructed to invest in alternative investments outside of firm-approved stocks, bonds or mutual funds that would be typically offered by brokerage companies. Now back to the Kotulas.

For full access to story, members may sign in here.

Not a member? Click here to Join Now. Or Click here to sign up for a FREE TRIAL.