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I have self-directed Rollover IRA account. I see a good opportunity to invest in foreign country as fixed deposit for 5 yrs. If in Indian Rupee it will earn more interest versus US$ denominations.

I have following questions in this regards:

  1. Can one invest self-directed rollover IRA money in foreign country ?
  2. If yes can it be only in US$ or is other foreign currency conversion allowed?
  3. If converted to INR, how to hedge against its depreciation ?
  4. How to report to the IRS?
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Publication 590 has a list of prohibited transactions that may incur taxes and penalties or forfeit the whole IRA altogether.

Foreign currency is not listed, and as such is not explicitly prohibited. However, IRS may claim it is based on some other rule, so better talk to a licensed tax adviser (EA/CPA licensed in your State).

In any case, the investment must be made through the IRA trustee which manages your account. Self-directed IRA means you decide what and how to invest, but the money still sits in a trust account which is managed by a trustee. That trustee will implement your instructions and perform the investments, and provide all the necessary reporting.

Keep in mind that not all the trustees accommodate for all the investment options. Some may not allow foreign currency transactions, even if the law allows it. You need to check with your trustee if the kind of transaction you want to do is supported.

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There are currently over 45+ custodians and administrators that specialize in self directed IRAs. While the IRS provides guidance as to what is not allowed in an IRA, each custodian has the right to limit the investment options further. You will need to check with your custodian if they allow the type of transaction you are looking for.

1) Yes it is possible

2) Check with your custodian

3) Custodians do not provide financial advice. You will need to figure out how to hedge this transaction, then ask if they allow it.

4) You will not be reporting to the IRS, the custodian will do that as per their banking requirements. If you need assistance in determining if a transaction is OK, then you should seek help from a licensed legal, tax or financial advisor with experience in this area.

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