Private Placements IRA

Private placements allow you to invest in LLCs, C corporations, partnerships, pooled investment funds, small businesses, and land trusts as part of your self-directed IRA.

A self-directed Individual Retirement Account can be put to work in ways that many people hadn’t even realized. One of those ways is investing in private placements using the funds and tax-sheltered status of the IRA. The term “private placement” refers to a variety of company types, so called because they are not being offered as shares on the open market.

You can invest your funds in small businesses, trusts, LPs (Limited Partnerships), C corporations, LLCs (Limited Liability Corporations), joint ventures, hedge funds, investment clubs, convertible notes, structured settlements, equity crowdfunding, land trusts, and foreign private equity, among other options. With any of these investments, your earnings will be sheltered from taxation just like the monies you contribute to the IRA yourself.


How it Works: the Private Placement IRA

To enter into a private placement investment, you first have to set up your self-directed IRA. It is highly recommended that you select a firm that specializes in this type of IRA, as well as the acquisition of private placement investments. You won’t be able to use a traditional brokerage firm, which typically will hold only highly liquid assets like publicly traded securities. Your selected trustee firm will assist with transactions and hold your securities and will be able to advise you on applicable regulations and processes.

With your self-directed IRA established, it can be funded with an allowed contribution or a rollover from another IRA. Then the work of selecting investments begins, and you want to be sure to do your due diligence. This aspect of Private Placement investment is both exciting and challenging. There are higher risks associated with private placement investing, but these investments also carry the potential promise of greater returns. If you make informed and educated choices, your IRA can grow exponentially.

Remember that the custodian firm doesn’t have any final say in your investment choices. They can offer you advice, but the choices are all yours.


Risks and Limitations of the Private Placement IRA

There are some limitations imposed on your investment in a private placement IRA. You can’t invest in any entity where you (or your spouse, or a close family member) own fifty percent or more of the company.  You also can’t invest in a company you work for or go to work at a company in which you have invested. Basically, you can’t make an investment where you would benefit at both ends of the transaction.

Along similar lines, you can’t invest in areas where you engage in personal uses, and you can’t sell your own personal shares in a company to your IRA. The kickback regulations could leave you suddenly bereft of the protections of the IRA.

There are also some limitations on the types of companies in which you can invest. You can invest in privately held businesses, which includes land or personal property trusts, C-corporations, LLCs, limited partnerships, and pooled investment funds.  You can’t invest, though, in a subchapter S corporation, life insurance, collectibles, or a General Partnership.

Federal regulations set parameters on the holding period with private securities, so be aware that you will be required to hold those assets for six months to a year before you can sell them. The exception to this is if the issuer of your privately purchased shares goes on to register those securities with the Securities Exchange Commission (SEC). Once they go public, your waiting period is over.

It is worth noting that when you make your own self-directed choices of private placement investments, you are doing so without the SEC oversight that you would get with an exchange-traded fund or a mutual fund. Having said that, even mutual funds don’t come with guarantees or seals of approval—and if you’re working with a trustee firm you will have some advice and guidance as you make your choices.


Advantages of the Private Placement IRA

Many people who choose this avenue of investment do so because they can choose to invest in things they’re excited about, or areas where they see a great potential for growth. A popular area for private placement investment right now is in health care companies and medical real estate. The aging Baby Boomer population is pushing health care into a rapid growth curve, making it an ideal target for investors.

Another rewarding approach is to fund something you find to be particularly meaningful. Whether it’s a new company with a great business idea, a local start-up, or the brainchild of someone you like and admire (so long as that person isn’t closely related), you can choose to invest your IRA dollars wherever you see fit. Many young companies seek out “angel” investors to get off the ground, and your IRA investments can fill such a role.

The beauty of using your self-directed IRA to make these investments is the factor of personal choice. A traditional brokerage firm is unlikely to allow investments in entities that are difficult to value. As custodian of the assets, the firm is responsible for keeping accurate track of the values of assets being held, so they decline to take on any investment that poses too great a challenge in that area. When it is you who are making the choice, you are responsible only to yourself, so it is you who will get to make the final judgment call.

Some of the options for Private Placement investments might include a hedge fund, an investment of venture capital in a medical firm or startup tech, stock in a local bank, or even pooling capital with a small group into an LLC to make larger purchases of real estate.

Of course, you could make these investments outside of the IRA using your own money, but then you’d be up against taxes and capital gains on all your earnings. When you use your IRA funds, all the resulting earnings will be tax deferred (in the case of a traditional IRA) or tax exempt (with a Roth IRA).