How to Invest in an Environmental IRA

by Rocco Pendola ; Updated July 27, 2017

An Individual Retirement Account is much like a blank slate. When you open an account, you have a broad universe of investment options to select from. While there is not a product known as an "environmental IRA," you can skew your IRA's holdings toward green choices.

Process

You kick off the process of opening a green IRA just as you would any other. Make a call or go online to a financial institution that offers IRAs, usually a bank, brokerage or mutual fund company. Make sure the company offers a brokerage IRA, which allows you to pick and choose from a wide array of investment options, including stocks, bonds and mutual funds. You'll have to decide what type of IRA suits you best -- a Roth or traditional IRA -- and set up your account particulars, such as naming beneficiaries and funding options, before moving forward.

Function

An IRA is a special type of investment thanks to the tax advantages it provides, particularly tax-deferred growth. The IRA does not tax earnings, such as dividends and capital gains, on IRA holdings; instead they grow tax-free until you access them. In the case of a Roth IRA, you may never pay taxes on earnings, as long as you follow IRS rules and guidelines, detailed in IRS Publication 590. When you invest cash in your IRA, it essentially sits there and waits for you to do something with it. If you don't, it usually sits in a reserve money market fund. You have the option to buy and sell stocks, mutual funds and other products, which is where the process of going environmental begins.

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Geography

As Jennifer Schonberger of The Motley Fool suggests, consider focusing on particular countries as you aim to make green stock or mutual fund selections for your IRA. For instance, Schonberger notes that China is an innovator in green technology, despite being one of the world's biggest polluters, as of 2010. Green investing can be high-risk, namely in emerging markets. Schonberger indicates that if you have a long time horizon before you need your money, you might be able to cash in on some green stocks with huge growth potential, if you can stomach the chance of getting hurt by some losers. Since the IRS considers 59 1/2 retirement age -- when you can make penalty-free IRA withdrawals with no questions asked -- time might be on your side if you are greening your IRA early on.

Expert Insight

If you don't fancy yourself as a stock picker, green mutual funds do exist. Run by a professional money manager, a mutual fund is basically a collection of different investments, often stocks. There are mutual funds that invest only in green stocks. As Steven Goldberg of Kiplinger points out, while risky, some green mutual funds have the potential of generating huge returns in your IRA, as alternative energy slowly, but surely, replaces fossil fuels as the world's main energy source.

Considerations

You don't have to buy and hold stocks or mutual funds in your green IRA. You can actively trade both products. When you sell a stock or mutual fund in an IRA, your IRA custodian -- the firm you opened the account with -- places the proceeds in a reserve cash fund in your account. Since its an IRA, any earnings you realized in the trade grow on a tax-deferred basis. The only way you pay taxes on a the proceeds of a trade is if you ask your custodian to distribute the funds to you. You can keep that money in your IRA as cash, or reinvest it in something else.

About the Author

As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.

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