1. Find a good custodian. Major investment firms, like Fidelity Investments, won't allow alternative investments as an underlying asset in an IRA. But Wolverton says the vast majority of those in the self-directed IRA business are honest. You can find them by checking out Retirement Industry Trust Association members here. The owner of the self-directed retirement plan may choose to use a securities broker to help them select listed stocks, bonds and mutual funds as investments in the retirement plan.
Securities brokers are regulated by the Financial Industry Regulatory Authority, and their backgrounds can be checked here. Mohr said to do your research; not all custodians handle all types of assets, so it's important to understand their services as well as their fees. Bishop said it's important to find a custodian who is not being promoted by someone selling something. And "if you can't find a custodian who is willing to make the particular investment, view that investment as a red flag," he said.
2. Familiarize yourself with IRS rules and regulations. If considering a self-directed IRA, make sure to understand which types of investments are prohibited so you don't incur harmful tax consequences. Consulting with professional investment advisers can help head off this type of situation.
3. Do your homework on investments. Research the investment to make sure you fully understand it. The SEC's Schock said to be especially wary of unsolicited offers, especially when a promoter promises guaranteed returns, since there are no guaranteed returns in investing. She advises checking with state securities regulators to see if there have been complaints about the promoter.
Wolverton said that investors should be suspicious of unverifiable biographies of managers or promoters. Ask questions about references and experience and determine whether the promoters are registered with the SEC, FINRA or state regulators. Request to see an offering memorandum and prospectus. Look over the financials.
Tom Anderson, Retirement Industry Trust Association president, said simply Googling the name of the person offering the investment can provide key background information, including whether there's been an arrest.
4. Read all materials pertaining to the investment. Bishop said it's key to closely review disclosure agreements that are part of any investment transaction or to ensure a financial, legal or tax expert does so. This will help you to better understand the expectations of return, liquidity issues, possibilities of loss and environmental liability, as well as the risk of a loss of principal if the investment goes belly up.
5. Involve a trusted professional. Schock says it's key to consult an accountant, lawyer or financial planner to independently evaluate the investment. Kirchenbauer agrees: "It's worth investing in someone's time to make sure you're not setting yourself up for a real problem," she said.