Ask someone how they invest for retirement, and you’ll likely get a simple response: the stock market. However, there is a wide world of investments out there, and they don’t all involve the public stock market. For Self-Directed IRA investors, another option is investing in private stocks, or Private Companies. And doing so can result in a lot of powerful growth within the retirement account, assuming that the investor chooses wisely.
But how does an investor use a Self-Directed IRA for Private Companies? And what might they expect the process to look like?
How Investing in a Private Company Through a Self-Directed IRA Can Work
As we note on the investing in Private Companies section of our website, it’s surprisingly easy. When you’ve established a Self-Directed IRA with a reputable Self-Directed IRA administration firm, your next step will be to direct that administration firm to purchase the shares on behalf of your IRA. You’ll do this by filling out a buy direction letter. The administration firm will then set up the documents, and have you sign them. It’s that easy.
Of course, choosing what to invest in is the difficult part, and that’s why many investors turn to Self-Directed IRAs: they want to make those choices themselves.
One common way in which Self-Directed IRA investors put money in Private Companies is by using a Self-Directed IRA that holds a Single Member LLC. This means that an investor creates a company that the Self-Directed IRA holds. This can create a situation known as “checkbook control”; since the investor has control over the Self-Directed IRA, which controls the LLC, control reverts to the investor. However, an investor still has to be wary about following the rules and understanding the limits of Self-Directed retirement accounts.
Rules to Remember When Investing in Private Companies
The information above is a great start if you want to learn how to invest in Private Companies with a Self-Directed IRA. But it’s not the only information you’ll need to know. You’ll also have to keep some very pertinent rules in mind as you go about your business:
- You can’t invest in a private company that you or any disqualified person owns, manages, or controls. This is a basic rule of thumb: no transacting with a disqualified individual with your retirement account. Doing so would create a personal benefit for you, which in turn means that this isn’t truly a retirement investment, but a personal one. You’ll have to avoid this if you want to continue to enjoy the tax benefits of a retirement account.
- Income has to be paid to your IRA according to the percentage of ownership. For example, if your IRA owns 30% of the company, it should receive 30% of the income. This helps verify that everything is as noted, and that your account is receiving the proper amount of income.
- Company management will have to submit an annual Fair Market Valuation and provide it to your Self-Directed IRA administration firm. If you work with American IRA, for example, we can absolutely receive this.
Investing in Private Companies can accomplish a lot. It can create astounding returns. It can give you a hedge against the public stock market. It can help you build retirement wealth that lasts. But like anything else, you’ll need to know how it works before you get started.