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Impact Investing: Invest in Your Principles & Your Retirement

  |  By Curtis Glovier

Hardly a day goes by without a new headline about the rise of impact investing. Whether the article refers to the category as environmental, social, and governance (ESG) investing, socially responsible investing (SRI) or sustainable investing the storyline is usually the same—impact investing is skyrocketing in popularity.

Investors are increasingly seeking ways to align their investments with their values—whether that means building a carbon-neutral portfolio, investing in companies committed to diversity or avoiding those that make or sell weapons or tobacco.

Impact investing not only provides investors with a tool for addressing their environmental and social concerns, but it also allows them to take a stand on issues that are core to their beliefs.

And that’s what makes impact investing a natural fit for self-directed IRA investors.

Impact investing’s heady growth

According to a 2017 Global Investor Study from asset manager Schroders, 70 percent of U.S. investors said they had increased their allocation to sustainable investment funds in the past five years and 81 percent said sustainable investing had become more important over that period.

As a result, global socially responsible investments are climbing—jumping 34 percent from 2016 to 2018 to stand at $30.7 trillion, according to the Global Sustainable Investment Alliance. In response, the financial services industry is launching a slew of new ETFs and mutual funds aimed at this socially-conscious universe of investors.

While buying ETFs and mutual funds is one way to add environmentally and socially conscious investments to your portfolio, it is not the only way. Investors may be able to take full control of their impact investment strategy—and their retirement savings—with a self-directed IRA.

Impact investing with a self-directed IRA

Self-directed IRAs put you in the driver’s seat when it comes to managing your retirement savings. While you can use a self-directed IRA to invest in exchange-traded assets such as stocks, bonds, and mutual funds, you can also use it to invest in an array of alternative assets of your choosing—including real estate, private companies, and hedge funds. The IRS only explicitly prevents you from owning life insurance and collectibles in your IRA.

This means self-directed IRAs can be an ideal vehicle for expressing your views on ESG and SRI investing. You can use your expertise and personal knowledge about an industry to invest your retirement dollars outside the box and take a hands-on approach to impact investing initiatives.

For instance:

  • If your expertise is in real estate, you can invest in green building projects.
  • If you are passionate about natural resources, you can buy sustainably managed farmland.
  • If your background is in private equity, you can support start-ups that are committed to diversity and inclusion.

Or you can approach impact investing from another angle:

  • If your concern is climate change, you can invest in an LLC with your IRA dollars to fund clean energy companies.
  • If you’re worried about plastics, you can invest in a start-up devoted to alternative packaging.
  • If you want to decrease greenhouse gas emissions, you can support real estate developments located near mass transit.

Using tax-advantaged dollars to make an impact

Pursuing impact-related opportunities with a self-directed IRA comes with the added benefit of investing with tax-advantaged dollars. When you own an impact investment in a self-directed traditional IRA, returns can compound year after year on a tax-deferred basis. If you hold ESG and SRI investments in a self-directed Roth IRA, account growth may accumulate tax-free.

While using your self-directed IRA to pursue impact investing may feel rewarding, it should also make financial sense. Impact investments should not be held to a lesser standard than any other investment in your retirement portfolio. After all, the point of an IRA is to fund your retirement. ESG and SRI investments require thorough vetting to ensure they meet your financial goals and risk tolerance.

We also advise working with investment professionals—such as financial advisors or tax attorneys—who can help assess the suitability of the opportunity you are considering while also ensuring your IRA remains compliant with IRS rules and regulations.

With investors displaying a heightened desire to “doing well while doing good,” impact investing with your self-directed IRA may allow you to do well for your retirement while also doing good for your values.

This article was first published May 24, 2019 on Forbes.com.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.