The available investment options for Individual Retirement Account (IRA) funds may be more and more diversified than you realize.
Traditional financial institutions that act as custodians for these accounts limit investment options to what they have to sell you—stocks, bonds, and mutual funds. However, the IRS is more open-minded, and it’s the IRS’s rules that matter.
The relevant IRS regulations that matter most when it comes to investing IRA funds have to do with self-dealing. Bottom line, you can’t do it. You can’t buy or sell something from or to your IRA personally. You can’t use any asset your IRA invests in yourself (this becomes important in the context of a real estate investment). You can’t hold collectibles such as antiques or artwork in your IRA, because these kinds of things could easily be “stored” in your house, amounting to personal use.
However, as long as you are not breaking the no self-dealing rules, the IRS is liberal in its position on how you can invest your IRA funds. You can purchase and hold real estate, private companies, private mortgages, or precious metals, as you like—including within and beyond U.S. borders.
The challenge can be your IRA custodian, which must approve any investments you want to make. It can be difficult or impossible to get a conventional financial institution to go along with your idea to invest your IRA funds in a beach rental condo on Mexico’s Pacific Riviera Nayarit coast, for example.
What the conventional financial institution managing your IRA probably won’t mention is that those groups aren’t the only possible legal IRA custodians. You can opt for an independent custodian that allows a broader range of investment options.
Putting IRA funds into non-traditional assets (that is, anything other than stocks, bonds, or mutual funds) requires more effort on your part. While a non-traditional custodian allows for other investment opportunities, they’ll require information on any non-conventional investment you want to make and the burden will be on you to provide it.
Decide to invest in a private company’s pre-IPO share offering, and the custodian will ask for the offering documents to review, among other things. The custodian could reject the investment if the vetting materials don’t pass its muster, but at least you’re allowed a chance to consider any investment that interests you.
The same goes for real estate. You are free to invest IRA funds in any piece of real estate you like as far as the IRS is concerned, including in any country anywhere in the world. However, if you want to put a rental property in Portugal, Colombia, or the Dominican Republic in your IRA portfolio, your non-traditional custodian will ask for details on the property. If you’re buying from a developer, they’ll want information on the developer. They aren’t, though, meant to be acting as an investment advisor. Rather, they are required to make sure the investment is qualified under IRS rules. Rarely have I heard of a non-traditional custodian telling an IRA owner that a specific investment was disallowed.
However, you can eliminate the need to request and be granted permission from your non-traditional custodian altogether by setting up an LLC for your IRA to invest in. Then you, as the managing member of the LLC, can decide solely when and how to invest the funds of the LLC. You simply request that your non-traditional custodian invest your IRA funds in the LLC. Then you’re free to operate independently from there.
This strategy is typically referred to as a Self-Directed IRA, but that’s misleading, as all IRAs are self-directed. You direct your IRA custodian where and how to invest. A more appropriate name for this IRA-LLC structure could be a Checkbook IRA, because you’re able simply to write a check from the LLC’s bank account to make investments as you want.
This doesn’t have to be an all-or-nothing strategy. You could leave part of your IRA invested in stocks, bonds, and mutual funds, under the management of a traditional custodian (saving on fees, as non-traditional custodians charge a separate fee for each investment) and invest the rest of your IRA funds in an LLC that has you as the managing member, leaving you free to invest these funds where you like, including overseas.
The realization, over the past decade or so, that IRA funds could be invested offshore created a new service industry helping people set up offshore LLCs for their IRAs. Often, it’s represented that this is the preferred or even the required approach. Indeed, the general rule of thumb is that it’s wise to keep onshore assets in onshore entities and offshore assets in offshore entities. Holding offshore assets in offshore entities puts distance between you and the entities and can therefore provide a level of asset protection. As well, an offshore LLC can bring other privacy and estate-planning benefits.
However, an IRA is an onshore entity, under the jurisdiction of the United States and therefore vulnerable to U.S. claimants. It holding offshore LLC doesn’t change any of that.
In addition, an IRA is already an efficient structure in the context of estate planning. You name a beneficiary who automatically receives the IRA when you pass away.
An offshore LLC cost 5 to 10 times more to set up and to maintain than a U.S. LLC. Why incur that added cost when setting up your Checkbook IRA when you could use an LLC from any U.S. state?
The answer depends on the types of offshore investments you intend to make. If you’d like to use IRA funds to buy real estate overseas, there is no advantage to using an offshore LLC, only extra expense.
However, if you would like to invest IRA funds in non-U.S. stocks, bonds, or mutual funds, you’ll need an offshore LLC, as non-U.S. stock brokers aren’t able to comply with SEC regulations related to doing business with U.S. persons or entities.