New York, NY securities attorney Jenice L. Malecki talks about the types of misconduct that can occur with self-directed IRAs. She explains that investors can encounter problems with self-directed IRAs in several ways. Sometimes, the investor’s own reliance on someone engaging in fraud—such as a Ponzi scheme or affinity fraud—can lead to losses. Fraudsters often present an illusion of success through flashy cars, expensive homes, or offshore accounts, making it difficult to detect the risk. While investors can pursue action against the fraudster, recovery is often challenging.

Another risk arises when investors transfer funds from a traditional brokerage account to a self-directed IRA based on the advice of a licensed broker or registered investment advisor. In these cases, there may be potential liability on the part of the brokerage or advisor if they failed to detect that the funds were being moved outside the firm or into an unmonitored outside business activity. Investors need to exercise diligence, as withdrawing IRA funds incorrectly can trigger severe tax consequences. If the money is not returned to a qualified IRA within 60 days, the IRS may treat the distribution as taxable, sometimes resulting in penalties up to 50 percent of the IRA assets.

She emphasizes the importance of reviewing applicable tax regulations with a qualified accountant to mitigate potential damages. Additionally, if a broker directed the transfer, investors may have recourse against the brokerage or investment advisor. Overall, careful attention and vigilance are crucial to protecting oneself from harm in self-directed IRA investments.