December 13, 2021

Avoiding Scams in a Self-Directed IRA Part 2 – Your Self-Directed IRA Should Watch Out For These Scams

Now that we have discussed educational resources and scam red flags, let’s get specific. There are a number of different kinds of scams that can target a Self-Directed IRA, but they all share the same basic structure. They offer some kind of alternative asset or system that is hard to find elsewhere, they make an extremely enticing claim regarding returns, and often there will be some kind of time-based push to get going. Let’s examine a few of the more popular scams. 

Affinity Fraud 

Affinity fraud is a particularly pernicious scam. It contains all the elements of a standard scam, but the delivery method bypasses your normal protective radar. It does this by using your community to make the pitch. Here’s how it works.  

  1. A scammer comes up with a fake investment or utilizes an existing asset that does not possess the claimed potential. Pitches will often sound credible and may push opportunities like a private hedge fund, a real estate investment, or an upcoming infrastructure project.  
  1. The scammer identifies a community that is tight-knit and therefore susceptible to affinity fraud.  
  1. The scammer joins the community and, using the natural trust of community members, pushes people into investing. Alternatively the scammer targets a leader of the community (or a few key members) and convinces them to invest. 
  1. Community members tell each other about the “amazing” investment opportunity. The fact that the information is coming from trusted sources causes many other people to jump on board. 

Affinity fraud is attractive to scammers because it makes committing fraud easier. The trust that is being utilized means that it is easier to convince people to buy into the investment. That trust also has a second advantage in the fact that it may be easier to delay any returns on the investment, thereby giving the scammers more time to profit. Finally, the scammer may be able to more easily escape prosecution, as communities are often reluctant to press matters when fellow community members may get into trouble. 

Another element of affinity fraud that makes it particularly relevant for Self-Directed IRAs is the fact that the Self-Directed IRA may be used as an accounting platform to facilitate investing. In this scenario, the scammer pushing the investment may tell people that they can buy in by setting up a Self-Directed IRA. This is often done in many legitimate funds and by itself, the mention of a Self-Directed IRA shouldn’t raise any red flags. However, combined with the community-based push, it should give potential investors another reason to look at the investment more closely. 

The key to combatting affinity fraud can be as simple as doing your homework. It’s possible that a good investment opportunity is making the rounds, but the source of the information shouldn’t affect how deeply you look into it. Any time you hear about a potential investment, you should research the same points of legitimacy, irrelevant of the source of the investment. (We will cover what some of those points are in the next installment.) 

Precious Metals 

Investing in precious metals with a Self-Directed IRA can come in three different forms. 

  1. A legitimate investment where the metals are sold by an honest business at market rate pricing and are subsequently held in a registered depository. 
  1. A legitimate investment where – unbeknownst to the Self-Directed IRA account holder – profits are achieved by high mark-ups or over-inflated account charges. 
  1. A scam where the metals are outright not purchased, or, even if they are, investor funds are eaten up through fake fees, commissions, and whatever else the scammers may innovate. 

Obviously we are going to focus on the third scenario here, but seeing the other two helps illustrate why precious metals are such a good asset for scammers. Precious metals are a legitimate investment opportunity, but the fact that there can be such a wide variance gives scammers room to make a pitch. Their marketing language may be similar to legitimate offerings and it's hard for an uneducated investor to easily tell the difference. With that in mind, here are some of the red flags most commonly associated with precious metals. 

  • Profits based on recent events – If the precious metals company promises large profits due to a recent news event (e.g. large mine discovered, a disaster that destroyed supply, etc.), that can be an indicator that not all is right. It’s very hard to predict the precious metals market and using gimmicky language indicates that the purveyors may not be honest. Your Self-Directed IRA should avoid these pitches. 
  • Cold calls – If you’re receiving investment pitches without having invited them, it could be a red flag. Aggressive promotion comes with a high price tag and that price has to be made up with investor funds.  
  • Offering financing – Financing is a classic tool for scammers as it allows them to charge you exorbitant fees and interest rates. In general it’s good to keep to the old rule that if you can’t afford to lose it, then you shouldn’t be making a bet with it. This is especially true for the funds in your Self-Directed IRA. 
  • Limited supply – Any pitch that claims a limited supply for any precious metal is already suspect. Obviously some metals are rarer than others and hence may have different price points, but almost any metal can always be found on legitimate exchanges. Your Self-Directed IRA should never be pushed into an investment because you feel it will miss out otherwise.  
  • Missing information – Any precious metals investment should be able to offer basic information like the specific depository being used or the company’s license. Failure to do so, or providing unusual information (like foreign addresses), is a red flag. Other points to be concerned about include unusually complex purchasing techniques, overly pushy sales people, and operating in a state that is not regulated by the CFTC or the National Futures Association. 

Other Scams 

Here are some other scams that may see your Self-Directed IRA as a tempting target.  

  • Binary options – A binary option is an investment which makes a specific bet that is either yes or no. (For example, will stock XYZ be trading for above $10.00 on November 15 2023?) Many scammers promise programs or apps to successfully invest in binary options. These often require nothing more from the investor than just clicking a button once a day. If it sounds too good to be true, it usually is. Most of the online binary options available are not compliant with U.S. regulations and may be engaged in illegal securities trading. The legitimate platforms that exist will be registered with the SEC. 
  • Microcap stocks – Microcap stocks are stocks of smaller companies that often have very low stock prices. The allure for your Self-Directed IRA is that you can get in on the ground floor of a stock before it starts its meteoric ascent. However, it is these very low prices that make microcaps so easy to use as scam bait. The “pump-and-dump" scam will have somebody pump up the price of the stock by massively promoting it, and then once enough investors have bought in, the promoter will sell off their shares at a profit. Investor research can be hard to perform on microcaps but it is certainly necessary.  
  • Pre-IPO Offerings – A pre-IPO offering is a chance to buy a company’s stock before it is taken public. It sounds great as it provides yet another opportunity to get into a good stock early. However, many pre-IPO offerings are purely fictitious and take advantage of the public’s interest in certain famous companies. Even when the offering is legitimate, it will usually have investment restrictions like only being available to accredited investors.  


A Self-Directed IRA is a great tool to expand your investing capability, but it needs to be very careful in its asset choices. Avoid scams by always doing research, staying away from red flags, and asking the right questions. 

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