For many people, the idea of retirement investing is typically restricted to one style: investing in public companies through the stock market. But there’s an entirely different set of assets available in a private market of stocks. Private company investing is a powerful way for many investors to leverage their retirement account to build astounding returns over time. But with a Self-Directed IRA, you also have to be clear about what it is you want to accomplish and inform yourself about the best ways to go about it. Here’s what you’ll need to know.
How Private Company Investing Works within a Self-Directed IRA
There are a few situations in which it might make sense to use a Self-Directed IRA to invest in a private company. For example, if you know of a private company that is currently offering stock options, you may be able to purchase them through your Self-Directed IRA. Investor Peter Thiel famously did so when he put PayPal stock into a Roth IRA. The astounding returns of PayPal made it possible for Thiel to potentially stow away billions of dollars in one account.
What you need to know about private companies may surprise you. Private company stock is not very different from public stock in terms of how your approach to investing might be; you’re still selecting stock and buying a share of a company. The difference is that a private company won’t be listed on public exchanges, which means that a simple brokerage account at an institution won’t be enough to find them. That requires finding the companies on your own and using a Self-Directed IRA if you want to put aside this stock for retirement.
Public Stocks vs. Private Companies
In the world of investing, most people who talk about “stocks” are talking about publicly traded stocks. That includes some of the most famous names in the world: Apple, Alphabet, Microsoft, and the like. These companies have high profiles and are listed on some of the most popular stock exchanges. Similarly, they may appear in stock funds with other top companies.
What differentiates private companies is that it essentially gives you room to invest in an alternative asset class. It’s true that these are still companies, but because they’re not available publicly, some people consider private stock or private company investing to be a different asset class.
Investing in LLCs with a Self-Directed IRA
Not all private company investing has to be with companies the Self-Directed IRA holder seeks out and finds. In fact, some people use Single Member LLCs within a Self-Directed IRA to establish what is often called a “checkbook IRA.” This arrangement, wherein the investor holding the IRA has checkbook control over the LLC, can provide a lot of flexibility for investments made by the LLC, which in turn is held within the IRA. However, this can sometimes create a complicated investing situation that will require an investor to work with accountants and financial advisors to make sure everything is done the right way.
For many people, the options of investing in private companies represent the reason they started investing in a Self-Directed IRA in the first place: they want more freedom with how they invest. However, every investor should know what they’re getting into before starting out. That means doing research on private companies and how they might relate to IRAs.