Investing in Oil and Gas in Your Self-Directed IRA
With radical Islamist groups overrunning Iraq, including a number of rich oil-producing areas, we could well be seeing a prolonged period of instability in oil supplies. Translation: Unless a resolution happens soon, oil prices are likely to rise and reach a baseline level higher than where they are today.
The best countermeasure – aside from a magic neutron bomb that only kills Al Qaeda/ISIS troops while leaving innocent Iraqis alone – is more investment into energy development elsewhere. And rising oil prices help make such investment more attractive.
The good news is, you can take advantage of rising oil prices, help reduce western dependency on middle-eastern oil, and profit at the same time by using your Self-Directed IRA to invest in oil and gas-related projects. Here are some of your options:
You can buy energy stocks. Obviously, you can take an equity position in companies like Exxon-Mobile and Chevron, right here in the U.S. You can also potentially buy ADRs (American Depositary Receipts) that allow you to take an ownership stake in oil companies from other regions, like Lukoil (Russia), Royal Dutch Shell (Holland), BP (Great Britain) and PetroChina (you guessed it! China!).
You can do so via your Self-Directed IRA or any other retirement account quite easily, and of course you can place orders with your broker in a taxable account.
There are also a number of energy-focused ETFs and closed-end funds you can buy that may directly or indirectly reflect gains from increased crude oil prices.
For American investors, though, buying such publicly-traded stocks and funds can be problematic. That’s because publicly-traded stocks are generally C-corporations. As such, they present the investor with the problem of double-taxation: Because American companies cannot deduct the income they pay to investors in the form of dividends, every dollar the investor receives has already been taxed – at the incredible rate of 40 percent.
This means that the investor is only receiving 60 cents on the dollar of total income – and then gets taxed again on that, sooner or later – either that same tax year in a taxable account, or when the investor withdraws any dividends received from a retirement account.
Fortunately, your Self-Directed IRA – and most other types of tax-advantaged retirement savings vehicles – is flexible enough to let you explore other options, including:
o Limited partnerships
o Master limited partnerships
o Closely-held c-corporations and LLCs
Many oil and gas and other energy investments generate income – commonly offset by substantial deductions for depreciation and depletion. These deductions become generally irrelevant when the interest is held in an IRA, but the general tax benefits of the Self-Directed IRA – deferral of income taxes and capital gains taxes on assets held within traditional IRAs, and generally tax-free income and growth in IRAs, still holds true.
Note: It is very common for partnership entities in these industries to use leverage. This could subject your Self-Directed IRA to a special tax called the Unrelated Business Income Tax, or UDIT.
There are a number of highly situation-dependent tax considerations when investing in limited partnerships and MLPs, both in and outside of Self-Directed IRAs. We recommend making these investments in close consultation with an experienced tax advisor. American IRA, LLC, does not provide tax advice.
Of course, if you are interested in energy investments in general, you aren’t limited to oil and gas development. You can also invest in pipelines and refineries, solar energy, windmills/wind energy and wind farms, coal, transport, storage and battery technology, and a nearly infinite variety of other opportunities. The sky’s the limit, and you are in control.
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