Using Self-Directed IRAs to Invest in Startups and Emerging Businesses

“Ack,” you say, checking the financial headlines. “Another company took off—and before I could even invest in it!” That’s life on the public stock market. It often seems like you miss out on the good opportunities simply because you didn’t have the ability to use the funds in your Self-Directed IRA to invest in emerging businesses. But what if you could? With a Self-Directed IRA, you can invest in private company stock. Once you do, you can put money in companies still in their infancy stage—a high-risk, high-reward strategy that could be the diversification your portfolio needs.

We’re previously highlighted what it means to invest in private companies with a Self-Directed IRA. But let’s explain what that means—and what you can do to change the look of your own portfolio.

How Self-Directed IRA Private Company Investing Works

Let’s zoom out first. What are we talking about? Private company investing refers to purchasing stocks in companies that are not publicly traded on stock exchanges. These companies are often in their early stages of development. As a result, they offer investors the opportunity to get in on the ground floor. Tech startups, emerging businesses—they’re all part of a broader landscape of private businesses. The only question is: which one will you invest in? Because with a Self-Directed IRA through a custodian who can handle it, you can own private company stock in a retirement account.

How it Works with Self-Directed IRAs

Investing in private companies through Self-Directed IRAs is straightforward. Simply instruct your IRA custodian, such as American IRA, to purchase shares on behalf of your IRA. Once the documentation is ready, the custodian will execute the purchase. Next, the shares will be held in the name of your IRA. This allows you to leverage the tax-advantaged status of your retirement account to invest as you see fit.

Key Rules and Considerations with Self-Directed IRA Investing

While investing in private companies with Self-Directed IRAs offers exciting opportunities, you’ll want to keep a few key things in mind:

  • Prohibited Transactions: You can’t invest in a private company that you or any prohibited person owns, manages, or controls. Why? This ensures that investments are made at arm’s length. You have to keep your retirement assets separate from your personal assets, after all.
  • Income Distribution: Any income generated by the investment must be paid directly to your IRA according to its percentage of ownership. This ensures that the tax benefits of the IRA are preserved.
  • Annual Valuation: Private companies must provide an annual Fair Market Valuation. They’ll submit this to the IRA custodian. This helps ensure accurate reporting and compliance with IRS regulations.

How Self-Directed IRAs Can Give You Greater Diversification

Investing in private companies through Self-Directed IRAs can be an incredible way to invest. For starters, you can diversify beyond the public stock markets. You can gain exposure to the potential growth of emerging businesses. You can complement traditional investments. You can even enhance your overall returns. However, you should always conduct thorough due diligence and work with a reputable custodian to make sure your account remains compliant with IRS regulations.

Investing in startups and emerging businesses through Self-Directed IRAs opens all sorts of possibilities. With the ability to tap into the potential of private company stock, you can position your retirement portfolio for long-term growth. To learn more about how Self-Directed IRAs can empower you to invest in private companies, please call 866-7500-IRA and we’ll be happy to tell you more about our custodial services for maintaining Self-Directed IRAs.

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