How do you invest in a private company in a Self-Directed IRA? The process is simple enough—as long as you know the rules. But for ordinary investors, using Self-Direction with an IRA isn’t always intuitive. You might be used to making investments without the restrictions of a retirement account. But as you’ll find out, the benefits to retirement investing can be well worth these restrictions—especially if you have the freedom to choose your own investments.
Investing in a private company can present a unique challenge. It can be a high-risk, high-reward scenario—and if it works well, you can enjoy a tremendous upside in a tax-protected account. In fact, on those rare occasions that a private company explodes in growth, it can be one of the fastest ways to achieve retirement wealth. But that doesn’t mean it will automatically work out that way. You have to be diligent about the investments you select and make sure to follow the rules.
Vital Rule #1: Do Not Invest In a Private Company You or Any Prohibited Person Owns
Let’s say you have a private company that you own personally. It’s great that you have this company, but you won’t be able to make investments into that company using funds within a Self-Directed IRA. This is due to the rules that you can’t transact with disqualified persons within a Self-Directed IRA—yourself included. “Disqualified persons” also refers to people you personally know, such as family members and business partners. As such, you wouldn’t invest Self-Directed IRA funds into the side company of a business partner, either.
The rules extend beyond ownership as well. Any private company that a disqualified person either owns, manages, or controls would be a disqualified investment.
Vital Rule #2: Income to Your IRA Will Represent Your Percentage of Ownership
If your IRA owns 30% of a business, it should receive 30% of income. This means that your income should be completely representative of your stake in ownership. This helps prevent all sorts of monetary maneuvering that can be dishonest and helps maintain a straightforward arrangement for the IRA.
Vital Rule #3: Fair Market Valuation
What is the fair market valuation? It’s something the company management must provide on an annual basis. In this case, it will be submitted to your Self-Directed IRA administration firm—a firm like American IRA—for tax reporting purposes.
Making a Private Company Investment Make Sense in a Retirement Portfolio
The most obvious advantage of a Self-Directed IRA is that it allows investors to branch out. Investors don’t have to be limited to a small number of investments like mutual funds. In this case, putting money in a private company can be a high-risk, high-reward-potential venture. But it’s also important that investors understand that just because an investment has tax benefits because it’s within a Self-Directed IRA account doesn’t mean that the investment itself is more sound.
Those investors who succeed are those who do their due diligence. They don’t take on a Self-Directed IRA for the purposes of randomly putting their money into different asset classes. Although diversifying into different asset classes can be a sound strategy for many investors, it’s important to consider how an individual investment will play into your particular strategy. As a Self-Directed IRA administration firm, American IRA doesn’t give specific investment advice. But a Self-Directed IRA administration firm can play a critical role in a Self-Directed IRA that is simple to understand and execute.