Diversification is the key to investment success. If your current portfolio holds a variety of publicly traded securities, you can further diversify by adding self-directed assets such as real estate and private placements to the mix. You can take that diversification even further by investing in a combination of domestic and foreign investments in an IRA.
Adding foreign investments to your portfolio may seem intimidating, but in reality, the process doesn’t differ much from a self-directed investment made domestically. Here are some things to consider when looking to use your IRA to invest offshore.
Check to See If the Country Where You Are Looking to Invest Recognizes IRAs
First, be sure to check if US retirement accounts are acknowledged as eligible investors, as some countries require investments to be held by an entity, such as an LLC.
If you are looking to use your IRA to invest in foreign property and the use of an entity is required, confirm whether you can use a US-based entity or if you will need to establish a foreign entity. This requirement should also be considered when looking at foreign private placements.
If your investment requires you to go through an IRA owned entity, you will want to be sure to familiarize yourself with the IRS rules for IRA investments. You can read more about these rules in our Guide to Prohibited Transactions.
Establish a Network of Professionals Local to Where You Are Looking to Invest
Unless you have lived or transacted business in the country where your investment is located, chances are you may not be too familiar with that country’s laws. To assist you with navigating the legal waters of your foreign investment in an IRA, consider seeking the help of a local attorney. They will be able to shed some light on how the investment can be structured with consideration to the country’s legal requirements.
If you are looking to invest in foreign real estate, you may also want to consider working with a property manager. Having a property manager can simplify the rent collection process and the upkeep of the property. Be sure to know what the property manager’s services cover before entering into the property management agreement.
Always Request a Translated Copy of the Investment Documents
Not only does Midland require a translated copy of the investment documents to administer the investment, but it is also a good idea, in general, to have a translated copy for your records. This translated copy is particularly essential if you are not fluent in, or only speak the basics of, the primary language of the country where you plan to invest. While you may have foreign legal advisors who can read and understand the original document, you may want to consider hiring a professional translator or interpreter. Getting a translated copy of the investment document allows you to read the documents yourself and review them with your advisors here in the US.
Do Your Due Diligence
If you are working with an investment company for a foreign investment in an ira, be sure to do a review of the company before committing to investing. What is their investment track record? Is the investment illiquid, and if so, are you able to handle not having liquidity or regular returns?
Check to see if the investment company you are looking to work with operates in the US, or solely offshore. For example, do they have satellite offices in the US? Do they have a US bank account? If the investment company banks domestically, this can help save you the international wire fees.
Be mindful that, even though your IRA is considered a tax-sheltered account, your IRA can owe taxes, which is particularly important if the investment is using leverage. When it comes to tax questions, consider seeking the help of a tax professional who is familiar with both IRA and foreign tax laws.
Educate Yourself on the Rules for IRA Investments
Whether onshore or offshore, it is vital to understand the IRS rules as a self-directed IRA owner. Some key principles to keep in mind include:
- All income must flow directly back to the IRA, or IRA owned LLC – you should never take receipt of investment income personally
- All expenses must be paid for with IRA funds – do not pay expenses for your IRA owned investment personally
- If partnering on the investment, income and expenses should be split pro-rata according to the percentage of ownership
- If investing in property, you cannot have any personal use of the property so long as the IRA owns any portion of it
- If investing in property, you cannot provide any sweat equity. A non-disqualified third party must complete all repairs and services
- The above extends to disqualified parties
And these rules are just the tip of the iceberg. You can learn more about the IRS rules in our Guide to Prohibited Transactions.
If you have any questions regarding foreign investments in an IRA, please contact us at (239) 333-1032 or visit our website at www.midlandtrust.com.
MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or his/her authorized representative must direct all investment transactions and choose the investment(s) for the account. Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.