You Asked, We Answered: Ways to Protect Your Self-Directed IRA From Fraud
Estimated reading time: 3 minutes
For last month's national webinar, we discussed how self-directed IRA investors can protect themselves from fraud and safe manage their accounts to keep it in good standing. Participants who joined our free webinar had the opportunity to ask our Business Development Manager, Bill Neville questions regarding the best practices for investment fraud protection. Continue reading to see what types of questions were answered from beginner and advanced investors, just like you...
Q: Are custodians like Entrust insured if an IRA holder had their assets stolen from their IRA account? If so, how much is one's asset insured, and is there a limit?
A: We do not insure any of the investments since it’s the IRA holder who sourced, conducted due diligence and directed the purchase of the investments in their IRA. The only investment that carries any insurance is the un-directed cash in an IRA account. This account is in a non-interest bearing checking account and is covered under FDIC insurance parameters.
Q: When receiving a written request for an IRA account distribution, how does Entrust verify that it's a legitimate request and not someone impersonating the account holder?
A: We acquire and require a valid ID from all of our clients to verify not only their identity but their signature. We have a distribution form that is used for distributions and the signature on that forms is compared to the ID provided. In most situations, a higher form of validation may be required including a medallion guarantee to validate the signature on the form.
Q: Where can an investor find out about good real estate investments?
A: Entrust would not be the source for this information. Any local professionals including real estate brokers or investment advisors in the REIT space would be a good start.
Q: Which brokerage company do you work with for investment of idle cash to invest in stocks and bonds?
A: Entrust currently does not have any platform offering stocks, bonds and mutual funds. Entrust is currently trying to forge relationships to provide this offering in the near future.
Q: Can my self-directed IRA hold a mortgage of a property sold from my self-directed IRA?
A: If you direct Entrust for your IRA to sell a property it holds to a non-disqualified party, your IRA could hold the mortgage on that property. Again only as long as the buyer is a non-disqualified party.
Q: If you invest in a private placement, and it leverages finance, how should you be accountable for UBIT tax?
A: Any income from a leveraged investment owned by an IRA is subject to UBTI. The income is called Unrelated Debt Financed Income and is a part of the UBTI the IRA has to pay taxes on. You will need to acquire an EIN for your IRA since your IRA will need to file a tax return using the IRS form 990-T. The tax on IRA income is taxed at trust tax rates. The tax will need to be paid from the IRA. Entrust does not prepare the 990-T. You, the IRA holder, will need to engage your tax advisor to complete such form ready for Entrust to file for your IRA.
Q: One common real estate fraud is using quitclaim deeds to transfer ownership. How does Entrust prevent this?
A: As mentioned in previous questions, any transaction must be initiated or approved by the IRA holder. If we cannot validate the signature on forms and documents, we will need to receive a higher form of validation of the signature on the form requests (such as a notary or medallion guarantee). Properties held by an IRA not only have the name of the IRA holder, but also have Entrust as custodian (in the name of the property). This ensures that any transfer of a property goes through the custodian’s approval process.
Thank you to everyone who participated in our national webinar. We encourage our readers to post any additional questions regarding self-directed IRAs or retirement planning in the comments section below. You can view the full recording of this webinar here to get answers to questions which are not listed in this article.