Politician Mitt Romney made headlines when it was estimated that he currently holds some $20 million to $100 million in an IRA. It wouldn’t be surprising for an average American to look at that figure, blink, look at the contribution limits of their Self-Directed IRA, and wonder how someone could amass so much wealth that way. In fact, the Atlantic once asked that question, saying: “How can an individual retirement account that was limited by law to annual contributions of at most $30,000 grow into a fund with more than $100 million in it?”
We can’t say for sure, but there are suspicions that Mr. Romney’s wealth comes from well-timed investments in private equity. That’s one reason why so many investors are intrigued by the possibility of using a Self-Directed IRA to invest in private companies. Similar to buying stock—but not on the public exchange—this method of investment could have tremendous growth potential if a company were to take off while you own stock that’s held within an IRA. Here is more information about investing in private companies with a retirement account:
How Investing in a Private Company Works with a Self-Directed IRA
Let’s say you were aware of a private company investment opportunity and you held a Self-Directed IRA with a Self-Directed IRA administration firm like American IRA. How would the logistics of such an investment work? You can find more information at our guide for investing in private companies:
You simply fill out a buy direction letter directing our staff to purchase the shares on behalf of your IRA. Once you have signed any documents related to the purchase as ‘read and approved’, American IRA will purchase the shares as you had directed. It really is that simple! All shares will be titled and vested in the name of your IRA in direct proportion to the percentage your IRA owns. American IRA, LLC, FBO, Your Name, IRA.
What’s important to keep in mind is that you will be in charge of the investments you make. A Self-Directed IRA administration firm won’t make recommendations for private companies to invest in, as they wouldn’t provide you with specific investment advice. They would administer an investment in the way described above.
Rules to Watch Out For
While investing in a company that then takes off in value can be a great way to build wealth, it’s not a risk-free way to invest. It’s also not without rules and regulations that have bearing on the way you might go about investing.
Here are some of the important rules to keep in mind:
- Disqualified person. Want to invest in a son’s company? Then you can’t do it with a Self-Directed IRA, because your son would be a “disqualified person” with whom your IRA should not transact. This is an important boundary between retirement funds and personal funds, and the IRS works hard to make sure people understand the difference.
- Income paid to the IRA. If you own 30% of a company, then the income generated by the investment should represent 30% of the income available. For more information, see our private companies section.
- Fair market valuation. A fair market valuation must be presented to shareholders by the company management.