Self-Directed IRAs for Private Companies

Are you sitting down? Good. Because imagine what your retirement account might have looked like if you owned shares in Google before the company went public. Or Microsoft. Or any big-time company that was once a private company that hit it big. It’s the stuff of many investors’ dreams. But what many investors don’t even dream of is the possibility of placing those kinds of investments within a tax-advantaged retirement account. But if you use your Self-Directed IRA to invest in private companies, you can.

How Self-Directed IRA for Private Companies Work

Investing in private companies with your Self-Directed IRA or Solo 401(k) is simpler than you might think. The process typically starts by filling out a buy direction letter, which instructs your IRA custodian to purchase shares in a private company on behalf of your retirement account.

After you review and sign any related purchase documents, your IRA custodian will handle the rest of the transaction. Voila. You can now hold private company stock in your retirement account. (The process, as it turns out, is far simpler than it initially sounds.)

Once the shares are purchased, they’ll be titled in your IRA’s name. For example, the shares would be held as “American IRA, LLC, FBO (For Benefit Of), Your Name, IRA.” The shares are then vested in direct proportion to how much of the company your IRA owns. So, if your Self-Directed IRA owns 20% of a private company, it’s that percentage of the company’s ownership that will be reflected in your account.

This straightforward process allows you to gain exposure to high-potential investments in private companies, all while benefiting from the tax advantages that come with an IRA or Solo 401(k). Whether you’re looking at private startups or established companies that are not yet publicly traded, your Self-Directed IRA opens the door to a world of investment opportunities.

Important Rules to Remember with Self-Directed IRAs

When investing in private companies through your Self-Directed IRA, there are a few important rules you’ll need to keep in mind. First, you can’t invest in a company that you, your family, or any “prohibited person” (such as a close business associate) owns, controls, or manages. These restrictions are in place to prevent any conflicts of interest or self-dealing. In fact, it’s a universal rule for investing with IRAs—not just one limited to private company ownership.

Another key rule? Income generated from your investment has to be paid directly to your IRA. For instance, if your Self-Directed IRA owns 30% of a private company, your IRA should receive 30% of the income generated by that company. This ensures the investment stays within the IRA structure and adheres to tax regulations.

Finally, keep in mind that an annual Fair Market Valuation (FMV) of the company has to be provided. This valuation is typically completed by the company’s management and submitted to your IRA custodian. The FMV helps determine the value of your investment, maintain accurate record-keeping and reporting.

Using a Self-Directed IRA to invest in private companies gives you a unique opportunity to diversify your retirement portfolio with alternative investments that aren’t available in traditional retirement accounts. And the returns can potentially be astounding, though it’s up to you to find the next Google or Microsoft.

Ready to learn more about private company investing from the protection of an IRA? Remember: it’s less complicated than it sounds, particularly if you’re working with a Self-Directed IRA custodian who knows how to streamline everything from paperwork to ongoing account maintenance.

Interested in learning more? Reach out to us here by dialing 866-7500-IRA.