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Self Directed IRA Investments - Private Equity

Private Equity

The IRS allows an IRA, Individual 401(k), HSA, or ESA to acquire private equity (an ownership interest in a private company) as an asset without penalty and while keeping the tax benefits associated with that account type.

Acquiring private equity as an asset in an IRA is one way to diversify your retirement portfolio. Unlike publicly traded securities, private equity does not have public disclosure laws associated with it. Therefore, the investor can use his personal knowledge and research to capitalize on a private equity opportunity. The returns of that investment can generate retirement wealth that is tax-deferred or tax-free.

The IRA ownership of private equity is usually expressed in a percentage of ownership or shares of stock.

The IRS requires an authorized IRA provider for all IRAs. Not all IRA providers allow account holders to purchase private equity, but New Direction IRA does.

You, the IRA holder, select a company in which you'd like to invest. You agree on terms with the company and direct us to send money from your IRA to close the deal. We make sure that the paperwork substantiates that the asset is part of your IRA and, thus, deserves the tax benefits associated with the account type. 

Benefits of Private Equity investments in IRA

  • Private equity is an asset that allows you to put your personal knowledge to work for your IRA.
  • Allows true diversification of your retirement account
  • You can choose the companies/entities in which the IRA invests.
  • You can apply your knowledge and expertise pertaining to the private equity market.
  • You can buy, sell and exchange equity without tax consequence.
  • Your IRA may invest in the following types of companies/entities: Start-Up Companies, Pre-IPO Companies, Limited Partnerships, Limited Liability Companies, Limited Liability Partnership, C-Corporations, Land Trusts and more.

Private Equity investment General Rules

  • Your IRA cannot purchase private stock that YOU already own.
  • The IRA holder participates on behalf of the stock that the IRA owns,
  • In most cases, neither you nor any disqualified persons (learn more) can be employed by the company while an equity position is held by the IRA.
  • The IRA cannot be a general partner in an L or LLP.
  • The IRA cannot invest into an S-Corp.
  • All Investment earnings must flow into the self directed IRA account.
  • Earnings from the entity may be subject to Unrelated Business Income Tax (UBIT) if the company has earnings from debt or has earnings from the sale of products or services.
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Self Directed IRA educational videos - Private Equity in IRA

Private Equity in your IRA/401k

In this Level I Presentation, investors discover how to purchase stock in a private company with an IRA/401k plan and get all the associated tax advantages. Small business is the backbone of our nation's economy. Companies such as HP, Merck, IBM, Disney and GE were once private entities that went on to become pillars of the American business landscape. Now you can learn the basics of investing your retirement funds in the next Microsoft, Disney or GE and receive a tax benefit too!

Private equity IRA - Important Things to know

  • The IRA is the owner of the private equity, not the IRA holder. Therefore, all relevant fees and costs are paid by the IRA and all gains go back to the IRA.
  • All legal documents related to an IRA-owned asset must be in the name of the IRA, not your personal name. 
  • New Direction IRA is required to report the fair market value of the account to the IRS each year. It is your responsibility to supply this information at the end of each year.

Due Diligence For private equity

It is the IRA holder's role to perform due diligence. New Direction IRA can service an equity purchase with any company/entity the IRA holder chooses. The IRA holder researches potential companies/entities and decides when they feel comfortable making the investment.

When deciding on a company/entity to invest in, the IRA holder might consider factors like competition analysis, past performance, background check of the company and/or principals, markets, and more. Many investors choose to consult a lawyer or financial professional before making an investment in private equity.

Step by Step Guide to Acquire Private equity

Step 1 – Open and Fund your IRA – It takes New Direction IRA two business days to open your account once your application is in the office.  Then you will fund the account with a rollover, transfer, and/or contribution.  This may take several weeks, so plan for that in your timetable.

Step 2 – Perform due diligence and choose a company/entity to invest in.

Step 3 - Fill out a Buy Direction Letter along with documentation of the investment (e.g. company operating agreement, stock certificates, etc.) and submit it to NDIRA .

Step 4 – NDIRA sends money from your IRA to the company to complete the acquisition.

Difference between private lending and private equity

  Private Lending Private Equity
Investee Non-disqualified business/entity or individual Non-disqualified business/entity
Asset Documentation Your IRA and the borrower sign an agreement, often called a note, that outlines the specifics of the loan. Equity may be represented in the form of shares of private stock or an ownership percentage.
How Your IRA Makes Money The amount of interest (and points if there are any) you charge is how your self-directed IRA plan earns a profit. Earns money based upon the performance of the business, from the sale of your IRAs ownership, or through the sale of the entire business as a whole at a later date.
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