Private Equity Investing Using a Self-Directed IRA

Published on September 19, 2019

Do you know someone who is starting a company and is seeking investors? Is there an established privately held company you’d like to invest in to help it expand—and earn some equity in the process?

If you have a self-directed IRA, you could include private equity investing for startups and other private companies within your retirement plan. The investment gives you shares that represent ownership or an interest in the entity. Private equity investments are among the many alternative assets in which you can use to build a more diverse retirement portfolio through self-direction.

What is a private equity investment?

Whether via accredited online crowdfunding platforms or direct investment, private equity is a capital investment in an entity that is not publicly traded; rather, it’s an investment in a privately held company. Once only utilized by high-net-worth investors, both accredited and non-accredited investors may now take advantage of this investment opportunity. Including private equity investments in one’s retirement portfolio also provides a hedge against the volatile stock market.

Examples of private equity investments are:

• Private common stock, preferred stock; options, rights, and warrants – shares in a private company, primarily held by its founders, venture capitalists, and private equity firms
• Private hedge funds – investors pool their assets with others to take advantage of investment strategies laid out by the fund manager
• Limited liability corporations (LLCs), limited partnerships (LPs)
• Foreign private equity – investment in privately held in non-U.S. companies
• Convertible notes – relatively short-term loans repaid through conversion to an equity stake in the company

When using a self-directed IRA, the plan invests directly into the business, partnership, or other entity, with terms worked out between the parties (in the case of a private placement, this is typically done via a subscription agreement). The entity gets needed capital and the self-directed investor diversifies his/her retirement portfolio by including this nontraditional investment within the retirement plan.

Ask your financial advisor if a private equity investment is right for you

As with any self-directed investment, account holders should conduct full due diligence about an investment opportunity before sending instructions to the self-directed IRA administrator. At Next Generation, we also strongly recommend that you check with your trusted advisor as to whether private equity and the potential tax liabilities associated with the investment fit with your financial goals. After all, every asset class has its risks – be sure you fully understand the upsides and potential downsides of any self-directed investment before making your decision.

For individuals who would like to invest in private equity, Next Generation offers complimentary educational sessions, so you can learn more about how these investments are structured with a self-directed IRA. Alternatively, you can contact our team with any questions about this or other self-directed investments by phone: 1-888-857-8058 or email: NewAccounts@NextGenerationTrust.com.