By: Dana Udumulla

Key Points 

• Self-Directed IRAs (SDIRAs) can be utilized for recovery support by investing in certain real estate, charitable initiatives, and companies with disaster assistance as their focal point.
• The SECURE 2.0 Act of 2022 lets account holders distribute up to $22,000 unpenalized from Self-Directed IRAs for natural disaster relief.
• It’s important to be mindful of prohibited transactions and IRA regulations.

As creatures of Earth, we’re at the mercy of Mother Nature’s temperament.  Proactive planners who want to make a difference may be considering implementing their Self-Directed IRA for natural disaster relief. This could be the saving grace wished for by those faced with environmental calamity. It’s possible to take your retirement savings and twist an act of nature into an act of service. Here’s some ways you can contribute. 

Getting Emergency Funds from My Self-Directed IRA for Natural Disaster Relief

On October 1, 2024, the IRS announced that taxpayers with IRA accounts in areas impacted by Hurricane Helene may qualify for early distributions. This option, known as a special disaster distribution, will not incur the usual 10% early withdrawal penalty. What’s more, the SECURE 2.0 Act of 2022 addresses hardship distributions concerning unfortunate environmental events. In the case of a federally declared disaster, up to $22,000 can be distributed from employer retirement plans or IRAs for stricken individuals. These distributions can be repaid to the IRA within a three-year period. 

While this is beneficial for IRA owners, those who have minimal to no retirement savings will still need aid.  There’s a selection of ways you can give a portion of your tax-advantaged gains to those affected. 

Identifying Qualified Individuals and Entities

Before commissioning your Self-Directed IRA for natural disaster relief, it’s imperative that you familiarize yourself with prohibited transactions. The typically most prominent in this scenario is the per-se prohibited transaction. Though the impulse to help a displaced family member may be fervent, certain individuals are not allowed to transact with your SDIRA. These individuals are categorized as disqualified persons. Having your SDIRA engage in any capacity with a disqualified persons results in a per-se prohibited transaction. 

Self-Directed IRAs for Natural Disaster Relief Meet Qualified Charitable Distributions

One of the simplest ways to devote your retirement savings to emergency support is to donate funds towards a non-profit focused on rebuilding and restoring communities hit hard by tumultuous weather. These donations have the potential to be tax-free so long as they’re considered qualified charitable distributions (QCDs). The administration of choice must bear the marker of a 501(c)(3) organization.  

In accordance, you must meet the age requirement of 73 and older (in 2024). This will allow you to transform your required minimum distributions (RMDs) into charitable donations. Following, your account type should be a Self-Directed Traditional IRA, Inherited Traditional IRA, or an inactive SIMPLE IRA or inactive SEP IRA. Self-Directed Roth IRAs are not allowed to partake in QCDs. This deduction can possibly help you down the line as it may lower your Adjusted Gross Income (AGI). 

Investing Your Self-Directed IRA in Natural Disaster Relief

If your favorite local business was affected by an environmental catastrophe, you can use money from your SDIRA to help reinstate their position by means of an investment. There are a few ways your SDIRA can contribute, and the ideal method may differ depending on said business’s preference.

Promissory Notes

Your Self-Directed IRA can issue a loan to your respective business of choice. With a promissory note, you’re drafting a written agreement that accompanies the loan. The details of the loan are pre-arranged and pre-approved by both parties before the signing takes place.  You (the lender) and business (borrower) are aware of the payment schedule, interest of loan, collateral, and due date. This leads to relatively consistent and predictable revenue flowing back into your SDIRA, and no surprises for any party involved. 

Crowdfunding and Startup Initiatives

With the effects of climate change underway, startups may be in their budding stages with rehabilitation efforts as their company’s mission.  If you believe in a small business’s objective, you can invest in that startup. This will help them further develop into the powerhouse, benevolent organization they aspire to become. You can possibly experience returns on investment while simultaneously improving society at large.

Crowdfunding initiatives could also have similar ambitions. Maybe this establishment is hoping to fund one or a few restoration projects in a specific neighborhood. These investments are looking to raise small amounts of money from a large pool of investors. This lets those who may not have a surplus of money to spare partake in a charitable endeavor. All the while, potentially expanding your retirement savings. 

Remedying Real Estate

Some homes or residences are left with the devastating aftermath of hurricanes and storms. Revitalizing these properties – or sections of communities – can be a magnanimous undertaking when employing your Self-Directed IRA for natural disaster relief. With real estate being one of the most popular alternative assets, investing in realty may be an easy transition into philanthropic ventures.

A major consideration is that none of these real estate investments should be self-serving. Meaning, investment properties are not meant for personal use, in combination with the use of any disqualified persons.  Consequently, you cannot personally manage any investment properties, or have you and disqualified persons/entities perform repairs. Third-party professionals must be hired for these tasks and alterations.  

Renovation and Resale

If you’re dedicated to rebuilding a community and creating homes for natives, investing in a house to renovate and resell it – also known as fix and flips – can be a worthwhile investment.  This will let you refurbish the property as you envision, thereby contributing to the process of raising the value and morale of the neighborhood. 

Rental Properties

Recovering areas may be deserted or have families in need of shelter and not enough stretches of land for new houses. Investing in rental properties – whether it’s a multi-family endeavor such as a condominium or apartment complex, or smaller-sized rental properties, can be helpful to those in need of temporary residency while their house is under construction. In general, the demand for these spaces is relatively high. These can be lucrative investments but also ones that align with charitable inclinations. 

Real Estate Syndications Need IRAs for Natural Disaster Relief

If you’re a passive investor, this may make a smoother onboard. Real estate syndications can be looking for Self-Directed IRAs for natural disaster relief. This is another type of group-effort investment that grants investors access to larger properties than they’d generally be able to invest in alone. There could be housing developments in need of capital, or the rebuilding of multi-family properties and commercial properties.  In this predicament, a syndicator or Investment Sponsor would be responsible for most of the work pertaining to this investment, including price negotiations and property management. 

Change the Course of Adversity with Benevolence

For those seeking to perform goodwill, leveraging Self-Directed IRAs for natural disaster relief may be the antidote.  Strides are made when we band together as communities and extend a helping hand. Whether you decide to invest in real estate, restoration projects, or charitable businesses and programs, you’re initiating positive change. 

Shaping Your Retirement

Grappling with the unexpected is the human condition, but you can be more prepared. Are you ready to build a retirement account for a potentially secure future? Our specialists are eager to share their extensive expertise and provide you with educational resources to come to your own informed decisions. Start a conversation with us today!