In this article, we’ll look at the process of investing your self directed IRA outside of the United States. This is the international self-directed IRA investment process in 6 steps. If you want to diversify your retirement account offshore, here’s how to do it.
First, let me define the term “self-directed IRA.” A self-directed IRA is a retirement account where you can “direct” your custodian to make a particular investment. You can ask them to make an investment and, if it’s within the rules, they will usually comply.
Most custodians allow only US investments. Very few have experience with international transactions. So, an international self-directed IRA account is a retirement account held at a custodian that allows for foreign investments.
Therefore, the first step in setting up an international self-directed IRA is to move your account from your current custodian to one that allows for international investments.
If you’re with Fidelity or some other big firm, you’re probably limited to investing in the products that your custodian offers. They have a menu of funds you can choose from and that’s it. No real estate, no high yield investments and no international transfers.
Very few self-directed custodians allow for international investments. Offshore investing with your retirement account is a small subset of the total custodians and a specialized niche in the industry.
The second step in setting up an international self-directed IRA investment is to search out potential investments and perform your due diligence.
For some, this simply means finding the best offshore brokerage or crypto exchange to trade your retirement account. For others, setting up an international self-directed IRA and investing offshore is much more than a Google search.
Some of our clients spend a great deal of time searching out and visiting real estate developments and projects in various countries. They might make 2 significant investments per year and put a lot of time and effort into finding those opportunities.
For these active investors, be they active in trading or active/diligent in searching out deals, the only way they can invest their retirement money is through an international self-directed IRA. Only a self-directed account gives them the freedom to control their investment and increase their returns over and above the index funds most US firms offer.
The third step in the international self-directed IRA process is to request a funds transfer or wire from your custodian. To initiate an investment, you’ll fill out a form provided by your custodian. This will include details of the investment, such as the amount, where to sent the funds, and if there are documents that require signing.
You’ll need to provide supporting documents to your custodian to prove the use of the funds. In most real estate deals, this is the purchase agreement and the marketing materials from the seller. The purchase agreement will usually be signed by your custodian.
The fourth step is to properly title the investment. The investment must be titled in the name of your retirement account and NOT in your personal name. An example of the ownership might be “ABC Custodian FBO Your Name and Your Account Number.”
The fifth step is for the custodian to process your investment. This includes reviewing the investment to ensure compliance with IRA rules and related due diligence. If you’re investing in an active business, this process can take some time. If you’re buying foreign real estate from a developer, this process will be rather simple.
For example, they’ll check for the involvement of any related parties. You can’t buy property from yourself or your immediate family. What I’ve seen happen with international self-directed IRAs is for people to find the perfect property, buy it, and then try to sell it back to their IRA. This type of self-dealing is absolutely not permitted, even if you sell it for the same price as you bought it.
The sixth and final step in the international self-directed IRA process is managing your investments within your retirement account. This means that all expenses of the investment must be paid by the IRA and all income must flow back to the account.
For example, if you buy a rental property, all improvements and upkeep of the property must come from your international self directed IRA. Likewise, the profits from your rental profits must be paid back to the IRA account.
Because it’s difficult to open a foreign bank account for a self-directed IRA, most simply hire a local property manager. The manager pays all expenses and sends the net profit back to the retirement account each month or each quarter. A local property manager is almost a must when you’re investing in real estate with an international self-directed IRA.
You can also use an offshore IRA LLC to hold your international IRA investments. However, this will increase your setup costs and means that you don’t have a custodian reviewing each investment for compliance with IRA rules.
If you are interested about opening a self-directed IRA please reach out to us here