close window  
Self-Directed IRA Accounts
by Tom Anderson

[This letter to GEO reports on a particular channel for socially responsible investing. This approach might be used in building the cooperative movement through, for example, co-op loan funds. We print this letter, therefore, for informational purposes. This should not be taken as an endorsement by GEO of the particular company providing the information.]

Dear GEO:

Socially Responsible Investing with Self-Directed IRAs.

A little-known but long-standing IRS regulation allows IRA funds to be invested in any number of non-traditional assets, including private notes and bonds, real estate, and private stock, just to name a few. This is done with what is called a Self-Directed IRA, administered by a qualified special asset custodian. This means that individual IRA account holders can direct their IRA funds to be invested with the non-profit socially responsible organization of their choice. This applies not just to individuals. An enterprise may have significant sums of money accumulated in its retirement accounts, which can now put to work for non-profits via non-traditional investments through the services of a Self-Directed IRA custodian

How is this done? Instead of the traditional methods of requesting donations, or using more expensive forms of financing, such as a bank loan, the non-profit [the recipient, not the investor] establishes an IRA investment vehicle to help fund its goal, for example loaning money to co-op start ups. The investment vehicle may be in any number of different forms, such as a bond or loan that pays a fixed interest rate or an equity interest in a limited liability company, a limited partnership or corporate entity. The non-profit sets the investment terms and conditions for investment, such as the duration of the investment and minimum investment amount. IRA funds from the non-profit═s constituents [the investors] would then be invested in the non-profit═s investment vehicle at the direction of the Self-Directed IRA account holder. As a result, the non-profit raises the needed funds and the investors are able to contribute without having to use current funds, while still earning income at market levels.

The contributors may not only invest their Self-Directed IRA funds in the non-profit═s investment vehicle, but may also designate the non-profit as the death beneficiary of the IRA. Then the non-profit will ultimately receive ownership of the original asset along with any accumulated income.

Typically, institutions that are licensed to administer IRA accounts, such as banks, credit unions, trust companies or savings and loan institutions, are not willing to undertake the challenging accounting, extensive paperwork, and IRS-reporting that is required in order to administer non-traditional assets within IRA accounts. There are only a few financial service firms that are willing and capable to provide the required custodial and administrative services. Many large discount brokerage firms claim to offer clients ´Self-Directed═ IRAs. But most of these institutions still restrict the ˝typeţ of investment to publicly traded investments.

A true Self-Directed IRA custodian allows clients to select from virtually any type of investment. Such investments as private notes, private bonds, limited partnership shares and private stock are possible choices for clients of firms that are truly Self-Directed. While clients can still include traditional investments such as stocks and mutual funds within their Self-Directed IRA, they also have the freedom to diversify their portfolio by adding a non-traditional asset.

For information on how Self-Directed IRAs can be used for socially responsible investing, contact Michael Scott at PENSCO Trust Company in Portsmouth, NH. Toll-free at 866-818-4472 or via email at penscotrust@mindspring.com.

Tom Anderson

President and CEO, PENSCO Trust Company

Include the citation below and GEO Newsletter grants permission to copy, use, and distribute this article.
Permission not for commercial or for-profit use.

©2001 GEO, P.O. Box 115, Riverdale, MD 20738-0115