What would it take for you to pull your retirement savings out of Wall Street and invest it in things that enrich your local community? Could you invest your IRA or 401(k) in, say, a local farm, solar cooperative, worker cooperative, or housing cooperative?
These questions are so worthy of answers that 15 volunteers and staff of Sustainable Economies Law Center gathered last year for a day at the law library to imagine and design a cooperative that would enable everyday people to direct their retirement savings into local investments. We sought to understand the applicable financial and tax regulations and assess the possibility that ordinary people could come together and form the required custodial entities to enable self-directed IRAs for themselves and their communities. Our key takeaways were: 1) It would be challenging, but not impossible; and 2) There’s so much we can do in the meantime!
This year, we’re continuing our study. While this is a work-in-progress, here are some early conclusions:
Self-directed IRAs have made a visible difference in my community. In 2012, I provided legal services to an organization called Wild & Radish when they acquired 10 acres of land. Now, that land has vegetables, fruit trees, goats, bees, and an ecovillage, and it has become the home base for one of the Bay Area’s most inspiring nonprofits, Planting Justice. It is also home to a heritage seed farm operated by Multinational Exchange for Sustainable Agriculture. To help make the substantial down payment, Wild & Radish and Planting Justice received five loans, totaling $90,000, from the self-directed IRAs of their fans and supporters. The lenders have been repaid on schedule with 3-4% interest. However, the return on investment is far greater, because, five years later, I can think of countless ways these groups have enriched the life of our community. They have launched a farm education program, created jobs for people in re-entry from San Quentin State Prison, grown healthy food for countless people in our community, installed permaculture gardens throughout the Bay Area, and so much more.
For many people, retirement savings may be the ONLY money they can invest. Only about half of people in the U.S. have savings, and, of those, about half have savings ONLY in the form of IRAs, pensions, and 401(k)s. This means that if a local farm enterprise is seeking micro-loans of $1,000 in order to crowdfinance the purchase of its farmland, for example, only about 25% of people have savings accounts they could readily draw upon to lend money. If it were easy for people to self-direct from their retirement savings, we’d double the number of people able to invest in that farm right now.
When long-term financing is needed (such as to purchase land), it makes sense to borrow from people’s long-term savings. A typical mortgage term is 30 years. At my age (37), that also happens to be roughly the number of years before I consider retirement. Since I won’t be needing my retirement savings any time soon, I’d be happy to see all of it loaned out to members of my community who are buying land and housing. But here’s the challenge:
Most retirement savings accounts are so small that custodianship costs would likely be greater than investment returns. Reality check: Perhaps we shouldn’t view that as a problem. 22.7% of IRAs are under $5,000. Many IRA custodians charge account set-up fees, transaction fees, account maintenance fees, and cash holding fees. For example, if I self-direct an IRA of $5,000 using the custodian Equity Trust, I would need to pay a $205 annual fee, plus a cash holding fee for any funds not currently invested. With that in mind, I suppose I would want to earn at least 5% per year in returns if I wanted to break even. But what if, like most people, I expect to grow my savings?
Recently, it struck me: Growing my savings by expecting a higher return on my investment is not necessarily a good thing for the world, because it could reinforce pressures for unsustainable economic growth.
Here’s another idea: A much better way to grow my savings is to save more money. Paying a $205/year to an IRA custodian is an expense, and so is the roughly $205 I spend on tortilla chips each year (yes, I have a weakness for chips). I can think of it as a matter of prioritization and mindful spending. For example:
Spend $205 for tortilla chips: Low priority. I can put some of that money in savings instead.
Spend $205 to unleash my retirement savings to create great things in my local community: Highest priority!
Here’s another consideration: Most retirement accounts are tax deferred, meaning that you won’t pay taxes on them until you spend the money, perhaps years down the road when you are retired and in a lower tax bracket. In that respect, the tax savings IS a return on investment.
Return on investment takes many other shapes. If I could lend $5,000 from my IRA to, say, a few worker-owned farms in my community, I will know with great certainty that positive returns will come to me in many forms, not the least of which is that I’d probably eat more vegetables and fewer tortilla chips.
Ice caps are melting and everyone should consider self-directing their IRAs right now. The costs of custodianship are also far outweighed by the benefits of getting money out of fossil fuels, heavy industry, agribusiness, and every other extractive and exploitative industry ASAP. There are not yet many IRA custodians that enable you to self-direct, but Slow Money of Northern California has done a detailed comparison of five custodians used by their members. See their blog post on self-directed IRAs. The custodian industry will grow with more demand, so consider moving your money now, and…
In the meantime, let’s start new IRA custodians everywhere! Sustainable Economies Law Center continues to flesh out our research into what it takes to launch and become an IRA custodian. Ideally, to facilitate local investing, there will be custodians in every state and even every community. And we envision that these custodians will be structured as cooperatives or nonprofits, to maximize user benefit and remove incentives to extract fees solely to drive profits to shareholders. Stay tuned for updates here.
Sneak peak: Solo 401(k)s hold some interesting potential. We’re also researching what it takes to self-direct a Solo 401(k). Our early research indicates that a special custodian is not necessary, which could drive down the cost of self-direction substantially for people with their savings in such accounts. A Solo 401(k) is a retirement account that self-employed people can create, and which can receive other forms of retirement savings (like IRAs) through rollovers. Anyone with self-employment income (which is around 34% of people in the U.S., and likely to grow to 43% by 2020) could potentially start a Solo 401(k), roll their savings into it, and easily/cheaply self-direct it. Stay tuned for updates on this and our other research related to retirement savings!