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Why due diligence is essential for using IRA money in ‘private’ deals

MarketWatch - By Dan Moisand

Although there are complications that arise, it is permissible to invest IRA money in offerings that are not publicly traded under certain circumstances.

Q. Two questions: (1) Can I invest in mineral rights in which I have no role who is drilling? And (2) Presently, I've only ever invested in publicly traded items, how does one best go about keeping the funds as an IRA (mine is a Roth) while investing in private opportunities? - ADV

A. Based on the brief description you provided, an investment in a mineral rights outfit that you have no role with is likely permissible, even if it is not publicly traded.

Some "non-standard" assets can be held by the traditional brokerage firms you see advertising all weekend during your favorite sporting events. They usually require documents regarding the securities in question and charge an additional fee to include the asset in the reporting. The fees are often a couple of hundred bucks or more, but the convenience may be worth it to you so ask whatever firm you use now for that IRA account.

If a traditional brokerage won't deal with the particular security in question, as is often the case, you will need a custodian that specializes in "self-directed" IRAs. I am not endorsing any in particular, but the ones we see used the most are Pensco Trust, Equity Trust, and IRA Resources, Inc

Self-directed IRAs are legitimate tools, but there are pitfalls. You should have good counsel independent of the mineral rights firm and the IRA provider.

I also recommend you have an independent party perform due diligence on the mineral-rights offering. Here, too, many are perfectly legit, but private deals are also where we see lots of frauds like Ponzi schemes.

People are often so enamored with the possibilities such deals present, they don't look into them enough. There is a place for being aggressive and speculating, but don't bet the farm, as they say, and don't buy because you get dollar signs in your eyes or are having your ego stroked by the exclusivity often touted by the sales people.

The more the sales folks downplay the risks, push you on timetable, or resist or delay in providing due-diligence information, the more wary you should be. If they are offering it to you, chances are good a lot of people with a lot more money, lawyers, and other resources available to them have passed on the deal.

To read this article on MarketWatch, click here.