Can You Use a Self-Directed IRA for an EB-5 Investment? A Guide to Using Retirement Funds for EB-5

For many prospective EB-5 investors, one of the biggest challenges is not whether they have sufficient assets to make an $800,000 investment.

It is determining which assets to use.

An investor may have substantial savings accumulated in a 401(k), IRA, or other retirement account but relatively little desire to sell real estate, liquidate an investment portfolio, or take a large taxable distribution simply to fund an EB-5 investment.

That raises an increasingly common question:

Can you use a Self-Directed IRA, or SDIRA, to make an EB-5 investment?

The Short Answer

Yes, in certain circumstances. A properly structured Self-Directed IRA can be used to invest in an EB-5 offering that accepts SDIRA investments.

Self-Directed IRAs can hold certain alternative investments, including private-placement securities that many traditional IRA custodians do not permit. EB-5 industry professionals have increasingly used this structure as an additional funding option for qualifying investors.

However, using retirement funds for EB-5 requires careful coordination. The investor must consider:

• Whether the retirement assets are eligible to be transferred or rolled over;
• Whether the EB-5 offering accepts SDIRA investors;
• The requirements of the SDIRA custodian;
• EB-5 source and path of funds documentation;
• IRS rules governing IRAs and prohibited transactions; and
• The investor’s individual tax circumstances.

An SDIRA can provide another potential source of EB-5 capital, but it should be structured with experienced immigration, tax, and retirement-account professionals.

What Is a Self-Directed IRA?

A Self-Directed IRA (SDIRA) is an Individual Retirement Account held by a custodian that permits a broader range of investments than many conventional IRA providers.

Traditional brokerage IRAs commonly focus on publicly traded investments such as stocks, bonds, ETFs, and mutual funds.

A Self-Directed IRA may permit alternative investments such as real estate, private-placement securities, promissory notes, and other assets permitted under applicable rules.

The tax rules applicable to the account depend on the type of IRA and the specific transaction. The word “self-directed” does not create a separate category of tax treatment. Rather, it generally describes an IRA whose custodian permits the account owner to direct investments into a broader universe of assets.

This distinction matters for EB-5 because Regional Center offerings are typically private investments rather than publicly traded securities.

Why Would an EB-5 Investor Consider Using an SDIRA?

For some investors, retirement accounts represent a significant portion of their accumulated wealth.

This can be particularly relevant for professionals who have worked in the United States for many years and accumulated substantial balances in employer-sponsored retirement plans.

Consider an investor who has:

• $1 million in a retirement account;
• $300,000 in readily available cash;
• Equity in a home;
• A taxable brokerage account; and
• Other long-term investments.

That investor may have more than enough total assets to pursue EB-5 but may not want to sell other investments or take a large distribution from a retirement account.

If eligible retirement assets can instead be transferred or rolled into an appropriate Self-Directed IRA and the EB-5 offering can accept that structure, the investor may have another funding alternative.

The important distinction is that the investor is not simply withdrawing retirement funds and spending them. The investment is generally made through the retirement-account structure, with the custodian holding and administering the investment.

How Can a Self-Directed IRA Be Used for EB-5?

The exact process varies depending on the investor, retirement account, custodian, and EB-5 offering, but a typical structure may involve several steps.

Step 1: Determine Whether Existing Retirement Assets Are Eligible

An investor may already have an IRA, or they may have retirement assets in an employer-sponsored plan such as a 401(k).

Not every retirement-plan balance can immediately be moved. Eligibility depends on the type of plan, the investor’s circumstances, and the terms of the plan.

For example, the IRS permits many eligible retirement-plan distributions to be rolled into an IRA, including through a direct rollover. However, an investor must first satisfy the plan’s conditions for taking a distribution; those conditions can include termination of employment or other qualifying circumstances.

Step 2: Establish the Self-Directed IRA

The investor establishes an account with a custodian that permits the type of alternative investment being considered.

All IRAs require an appropriate trustee or custodian. In the case of an SDIRA, the custodian holds and administers the account while allowing the investor to direct investments into permitted alternative assets.

Step 3: Move Eligible Retirement Assets

Where permitted, eligible assets may be moved to the SDIRA through an appropriate transfer or rollover.

How this is done matters.

The IRS distinguishes between direct rollovers, trustee-to-trustee transfers, and distributions paid directly to the account owner. Different methods can have different withholding, reporting, and tax consequences.

This is one reason investors should coordinate the transaction with their custodian and tax adviser rather than simply withdrawing money from a retirement account.

Step 4: Complete the EB-5 Subscription Through the SDIRA Structure

If the offering accepts SDIRA investments, the subscription documents and investment are structured to reflect the retirement account and custodian appropriately.

The custodian then processes the investment according to its procedures and the investor’s direction.

Because this differs from an investor simply wiring personal funds from a bank account, the Regional Center, fund administrator, immigration attorney, and custodian should be coordinated before the investment is made.

Can You Use a 401(k) for an EB-5 Investment?

Potentially, but usually not by simply directing an ordinary 401(k) to invest in an EB-5 offering.

Many employer-sponsored retirement plans offer a limited menu of investments and do not permit participants to invest directly in private placements.

Depending on the investor’s circumstances and the rules of the retirement plan, eligible 401(k) assets may be capable of being rolled into an IRA that permits self-directed alternative investments.

The IRS confirms that eligible distributions from qualified plans, including 401(k) plans, can generally be rolled into traditional IRAs, subject to the applicable rollover and plan-distribution rules.

This makes the distinction important:

Using a 401(k) for EB-5 may actually involve moving eligible 401(k) assets into an SDIRA first, rather than investing directly from the existing 401(k).

Investors should confirm eligibility with their current plan administrator and professional advisers before initiating any transfer.

Does Using an SDIRA Eliminate EB-5 Source-of-Funds Requirements?

No.

This is one of the most important points for EB-5 investors to understand.

Using a Self-Directed IRA does not eliminate the requirement to establish the lawful source and path of the EB-5 investment capital.

USCIS requires EB-5 investors to establish that the capital invested was obtained through lawful means and to document the path of those funds into the investment. USCIS guidance identifies employment income, business income, tax records, loans, gifts, property transactions, and other supporting evidence as potential components of a source-of-funds filing.

For an investor using retirement assets, the documentation may therefore involve establishing how the retirement funds were accumulated as well as documenting transfers or rollovers leading to the EB-5 investment.

Depending on the investor’s circumstances, relevant documentation could include retirement-account statements, contribution histories, employment and income records, rollover documentation, custodian records, and evidence tracing the ultimate transfer into the EB-5 offering.

The specific documentation required should be determined with the investor’s EB-5 immigration attorney.

An SDIRA provides a potential funding structure. It does not bypass EB-5 source-of-funds requirements.

What Does the SDIRA Custodian Actually Do?

The role of the custodian is frequently misunderstood.

An SDIRA custodian generally:

• Holds and administers the retirement account;
• Processes investments at the direction of the account owner;
• Handles required account documentation and reporting; and
• Facilitates transactions involving assets permitted by the custodian.

What the custodian generally does not do is equally important.

The SEC’s Investor.gov specifically cautions that Self-Directed IRA custodians generally do not evaluate the quality or legitimacy of an investment, verify financial information provided by an investment sponsor, or provide investment advice.

Therefore:

The fact that an SDIRA custodian accepts an EB-5 investment should not be interpreted as the custodian approving, underwriting, or endorsing that investment.

Investors must still independently evaluate the underlying EB-5 project.

Does Using an SDIRA Make an EB-5 Investment Tax-Free?

Not necessarily.

This is an area where investors should be particularly cautious about overly broad claims.

An eligible direct rollover from certain retirement plans to an IRA generally does not create current taxable income simply because the assets were rolled over, while distributions that are not properly rolled over can create taxable income and potentially additional taxes. Roth conversions and other transactions may have different consequences.

In addition, investments held within IRAs can sometimes generate unrelated business taxable income (UBTI) depending on the nature and structure of the underlying investment. The IRS specifically notes that an IRA can be subject to tax on unrelated business income in certain circumstances.

The tax treatment therefore depends on facts including:

• The type of retirement account;
• How assets are transferred;
• The structure of the EB-5 investment;
• The income generated by the investment; and
• The investor’s individual circumstances.

Investors should speak with a qualified tax professional before assuming that an SDIRA strategy will produce a particular tax result.

What Are Prohibited Transactions?

Self-Directed IRAs are subject to IRS rules designed to prevent improper use of retirement assets.

The IRS identifies a number of prohibited transactions involving an IRA and certain “disqualified persons,” which may include improper personal use of IRA assets, lending or extending credit between an IRA and a disqualified person, or certain transactions involving the IRA owner and related parties.

The consequences of violating these rules can be significant. Depending on the circumstances, a prohibited transaction can cause an IRA to lose its tax-advantaged status and trigger tax consequences.

Because an EB-5 investment also has an immigration objective for the investor and family, investors considering an SDIRA structure should have the proposed transaction reviewed by professionals familiar with both the retirement-account and EB-5 aspects of the transaction.

Paragon Now Supports SDIRA-Funded EB-5 Investments

Paragon Capital Group recently established a relationship with a self-directed IRA custodian to provide an additional funding option for eligible EB-5 investors.

For investors who determine with their professional advisers that an SDIRA is appropriate, Paragon can now coordinate with the custodian, the investor’s immigration counsel, and the other professionals involved in the subscription process.

We believe this is particularly relevant for prospective investors who have accumulated significant assets in U.S. retirement accounts but may have assumed those assets could not be considered as part of their EB-5 funding strategy.

The addition of an SDIRA option does not change how Paragon evaluates an investor or an investment. It simply provides qualifying investors with another potential way to structure the source of their EB-5 capital.

Just as importantly, neither Paragon nor the SDIRA custodian should replace the investor’s independent immigration, tax, or investment advisers.

Frequently Asked Questions About Using an SDIRA for EB-5

Can I use an IRA to fund an EB-5 investment?

Potentially. A Self-Directed IRA that permits appropriate alternative investments may be used to invest in an EB-5 offering that accepts the structure. The transaction must be properly structured and should be reviewed by the investor’s immigration and tax advisers.

Can I use my 401(k) for EB-5?

Some investors may be able to roll eligible 401(k) assets into an IRA that permits self-directed alternative investments. Whether a particular 401(k) balance is eligible to be distributed or rolled over depends on the plan and the investor’s circumstances.

Do I have to withdraw the money from my retirement account first?

Not necessarily. Depending on the account and transaction, retirement assets may be transferred or directly rolled over without first being paid to the investor personally. Because the tax treatment differs depending on how a transfer is executed, investors should coordinate with their plan administrator, custodian, and tax adviser.

Does an SDIRA reduce the amount I need to invest in EB-5?

No. The use of an SDIRA is a funding method; it does not change the applicable EB-5 investment requirement.

Does using retirement money simplify the source-of-funds process?

Not necessarily. USCIS still requires the investor to establish the lawful source and path of the capital. Retirement-account records may become an important part of that documentation.

Does the SDIRA custodian approve the EB-5 investment?

No. A custodian’s willingness to hold an investment does not mean the custodian has approved or endorsed the investment. The SEC specifically warns investors that SDIRA custodians generally do not evaluate the quality or legitimacy of investments held in the account.

Is a Self-Directed IRA right for every EB-5 investor?

No. An SDIRA may be useful for investors with appropriate retirement assets and circumstances, but it introduces additional tax, administrative, documentation, and compliance considerations. Investors should evaluate the structure with qualified immigration and tax professionals before proceeding.

Final Thoughts

For years, EB-5 investors have commonly funded their investments through accumulated income, property sales, investment portfolios, gifts, loans, and other lawful sources.

Self-Directed IRAs add another potential option.

For investors who have accumulated significant retirement assets—particularly professionals who have spent many years working in the United States—an SDIRA may provide a way to consider those assets as part of a broader EB-5 funding strategy without necessarily taking a conventional cash distribution first.

But the structure must be handled correctly.

A Self-Directed IRA does not eliminate EB-5 source-of-funds requirements, does not eliminate investment risk, and does not automatically create a particular tax result.

What it can provide is greater flexibility.

At Paragon, our goal is to give qualified investors access to thoughtful EB-5 investment opportunities while also helping them understand the different ways those investments may be structured. By adding support for SDIRA-funded subscriptions, we can now accommodate another potential source of capital for investors who, together with their professional advisers, determine that using retirement assets is appropriate for their circumstances.

This article is provided for general educational purposes and does not constitute immigration, legal, tax, or investment advice. Investors considering the use of retirement assets for an EB-5 investment should consult their own qualified advisers regarding their individual circumstances.