Duty to diversify investments in a self-directed IRA?

[Guest ERISA_kid]

Is anyone aware of any guidance from the Service regarding the duty of an IRA owner to diversify his/her investments in a self-directed IRA? As an IRA custodian, we receive many requests from IRA owners to direct nearly 100% of the IRA's cash into one investment. Any insight would be greatly appreciated.

[joel]

What does your lawyer say?

[Harwood]

All Publication 590 has is a warning against traditional IRAs investing in most collectibles.

http://www.irs.ustreas.gov/pub/irs-pdf/p590.pdf

[mbozek]

Diversification of investments is only required in plans subject to ERISA. IRAs are not employer sponsored plans subject to ERISA.

[Guest ERISA_kid]

I understand ERISA's "prudent person" rule, but see the language in the DOL letter ruling below regarding IRA diversification:

"With respect to the third factor listed above, substantially all of the [*9] IRA's assets were involved at the time of the purchase of the Note. It has been the Department's longstanding policy not to grant exemptions that may raise significant issues under other provisions of ERISA or the Code. Please note that section 408(a) of the Code provides that the term "individual retirement account" means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries. In this regard, the Department has been advised by the Internal Revenue Service that a lack of diversification of investments may be inconsistent with the exempt purpose of an IRA, which is to provide retirement income. Further, we have been advised by the Service that a violation of the "exclusive benefit rule," as set forth in section 408(a) of the Code, may exist when an individual retirement account lacks the requisite diversity that such account must maintain to ensure its tax-exempt status." Exemption Application No. D-10383 (1997 ERISA LEXIS 22)

Obviously, the DOL only alludes to the Services's potential position in this letter. For that reason, I was looking for more concrete guidance.

[E as in ERISA]

I think it's like getting Al Capone on tax fraud. Non diversification in itself is generally not going to cause an IRS or DOL examination (and not a participant lawsuit). E.g., if I want to invest all of a small IRA in an unrelated company, they're not going to come after the IRA. But if the IRS or DOL thinks that the IRA is primarily being use for other purposes, then it can use this rule to take away the IRA status for the account. E.g., if I'm using the IRA to purchase stock or land from a quasi-related party, it may become suspicious.

What's the answer when asked: Why this investment? Because...it's a great investment and I'll be able to RETIRE early on it? or a "Because" that has nothing to do with the IRA?