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PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

Using Your Self-Directed IRA To Do Well While Doing Good

  |  By Chris Shanahan

On the PENSCO blog, we often talk about using your self-directed IRA to invest in what you know and love. During the holidays, we have also explained how you can use your IRA to support charitable organizations by making a qualified charitable distribution (QCDs)[1]

In the midst of the holiday season this year, we wanted to explore how you can use your self-directed IRA to invest in a manner that may be considered a combination of these two ideas. Recently, our CEO Curtis Glovier spoke with the New York Times for an article that focused on using your self-directed IRA to do well while doing good.

The article cast a spotlight on self-directed IRA investors who have used their retirement funds to invest in opportunities that support their social conscience, while also offering the potential to boost the balance of their IRA. For instance, the article described one investor who used his IRA to issue a promissory note so his friend could acquire a property to start a group home for veterans suffering from post-traumatic stress.

At PENSCO, where we custody alternative assets for our clients’ IRAs, we’ve seen clients who are passionate about the environment use their retirement funds to invest in clean energy or clients who want to support medical breakthroughs by investing in biotechnology. But not all self-directed IRA owners are aware this method of retirement investing is even possible. 

“Most people know that they can make charitable contributions via their distribution,” Glovier told the New York Times. “We’d like to get the word out that you don’t need to just invest in plain vanilla mutual funds.”

Investing Your IRA: Helping Others And Helping Yourself

Frank Bridges is the founder of Heritage Design Law LLC[2] and an attorney who advises clients, including some PENSCO clients, on how to use self-directed IRAs. One of his clients uses their self-directed IRA to invest in Section 8 housing for mentally disabled adults. Section 8, also called the housing choice vouchers program, is a government program that provides financial assistance to low-income families, the elderly and the disabled to help them afford housing.

But Bridges is quick to point out that while the investment helps mentally disabled adults find affordable housing, the investment also helps his client make money for his retirement.

“This is not just a charitable endeavor,” he said.

Bridges cautions that investors need to remember that this approach to investing is not the same as simply giving money to charity. These investments can be risky and require long holding periods. Working with investments that may involve friends or family can add another layer of complexity.

In addition, investors must be cognizant of strictly adhering to IRS rules because running afoul of them—especially those regarding prohibited transactions such as a disqualified party—could result in taxes or penalties.

Bridges recommends that when it comes to investment opportunities that provide the chance to do well while doing good, investors should approach them the same way they would any other investment. Conduct ample due diligence before moving forward and ensure the investment matches your financial goals and risk tolerance.

Remember: The purpose of an IRA is to prepare for retirement by growing your nest egg. You can always support a friend, family member or charitable organization with a donation from your non-retirement funds if that makes more sense as part of your financial planning process.

If you are interested in doing well while doing good, it is recommended that you work with a financial advisor who can help you determine the suitability of an investment. Also, it is advised that you consult with a tax or legal advisor who is familiar with self-directed IRAs and can help ensure your IRA remains compliant. 

However, for investors who determine it is appropriate for their particular situation and who are comfortable investing outside of the traditional stock and bond markets; investing in efforts that help a particular cause may align your personal values with your investment decisions.

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. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.

 

[1] Only available to those who are over age 70.5 and have to take a required minimum distribution.

[2] PENSCO is not affiliated with Frank Bridges, Esq. or Heritage Design Law, LLC and does not make any recommendation as to whether or not readers use the services of Mr. Bridges or his firm.