Learn more about Dmitriy on NerdWallet'sAsk an Advisor
Retirement investing may not seem like the most exciting activity, but with self-directed IRAs, plan owners can get more creative with their investment selections. One of my clients stands out when it comes to creative investments. His pick? Organic mango and neem tree farms.
Regular IRA plans are managed by a custodian (a brokerage or financial institution that is approved by the IRS) thattypically offers only mutual funds, stocks and bonds and must approve each transaction. But with self-directed IRAs, the financial institution holding the account plays a passive role, simply executing the wishes of the account owner. Funds are placed in a special-purpose LLC with the plan owner named as the manager. Plan owners make investment decisions on their own and have a much wider selection of investments to choose from, including alternative investments and real estate.
My firm is one such institution. We offer self-directed retirement plans for a fee and allow our clients to choose assets to invest in. My client Bill works at an auto manufacturing plant in Bloomington, Illinois. He has a 401(k) through his employer and another IRA. With the IRA and 401(k), his money is completely invested in stocks and bonds and managed by financial advisors. At age 60 and approaching retirement, Bill wanted to diversify even more, so he chose to open a self-directed IRA. “You can be diversified within the stock market, but it is all still the stock market,” Bill told me. He started looking into real estate and other investment vehicles to help secure his financial future.
During his research, Bill came across an online magazine called Live and Invest Overseas. (Bill and his wife are avid travelers and plan to move out of the country after he retires, so this type of investing suits them.) The magazine publishes information on business and investment opportunities abroad. While such investments can help provide asset class diversification, in many cases, the investments will also involve a foreign currency, further diversifying your holdings.
Through this publication, Bill found the opportunity to invest in an organic mango farm in Panama. After his self-directed IRA LLC was set up, he purchased 1 hectare, or about 2.5 acres, of farmland through a company called Simply Natural Investments, which runs a turnkey operation. He visited Panama, toured the mango farm and decided to go through with the investment. Once Bill purchased his farmland, Simply Natural took over all the operations from prepping the land and sowing the seeds to exporting the produce.
Using his self-directed IRA, Bill also purchased farmland on a neem tree farm in Brazil through Liquid Investments, a U.K.-based firm. Nicknamed “the hospital tree” in India, neem trees have antibacterial benefits and can be used in pharmaceutical and cosmetic products.
While every investor has his or her own preferred investment choices, Bill’s story shows how liberating self-directed retirement plans can be for some investors, so long as they follow IRS rules and regulations.
For example, plan owners are allowed to direct their IRA investments themselves, but such investments need to be at arm’s length. If the IRA plan holds real estate, for instance, the plan owner cannot live on the property, or rent it out to herself or other disqualified persons, such as her spouse, parents or children. The IRA cannot lend to or borrow money from the plan owner, or give personal benefits to the plan owner in any way.
While traditional IRAs held with custodians often have limited investment options within the stock market or money market, self-directed retirement plans allow investors to diversify far beyond that. In Bill’s case, having control over his selections and not having to wait for custodial approval on the transactions was critically important. However, investors should be aware that fees differ for self-directed retirement accounts and could cost more than traditional plans.
If you are interested in investing for retirement beyond the scope of the financial markets, you may want to consider a self-directed IRA. Custodians or facilitators specializing in self-directed accounts will not recommend investments. With a self-directed IRA, you are in the driver’s seat.
Dmitriy Fomichenko is president and founder of Sense Financial, a provider of self-directed retirement accounts.