Becoming an Elite Investor: Investing in a Private Placement with a Self-Directed IRA
By: Dana Udumulla
Key Points
- Investing in a private placement with a Self-Directed IRA (SDIRA) gives you the opportunity to contribute to a smaller venture in need of capital that isn’t accessible to the public market.
- Utilizing your retirement savings for this type of endeavor comes with a glut of benefits including tax-advantaged growth and retirement portfolio diversification.
- There are many private placement investments available including hedge funds, private equity funds, small businesses and startups, real estate, and crowdfunding initiatives.
Self-Directed IRAs (SDIRAs) grant their owners the ability to invest in alternative assets that are generally uncorrelated to Wall Street products. Securing an investment in a private placement serve as a primary example. The companies holding affiliation with Wall Street tend to be of a certain scale and revenue. This may cast aside smaller-sized investments – such as private placements - which can harbor benefits to holders of Self-Directed IRAs. Let’s get a deeper understanding of how private placements work, and how you can go about investing in one with your SDIRA.
The Echelon of Private Placements
The definition of a private placement is seemingly easy to digest. Essentially, it’s an investment in a private company or entity. Private placements are also commonly referred to as private stock or private equity and are generally not available to perusers of stock market products. This is because private placements involve the sale of securities directly to a small number of targeted investors.
Since the Securities and Exchange Commission (SEC) only observes the sale and distribution of securities that are for consumption to the public, private placements do not have to be concerned with the same set of rules for regulation and disclosure. Avoiding this adherence results in most of these private placements only being offered to accredited investors who are assumed to be fiscally knowledgeable. Despite this, there are some instances where opportunities may arise, where private placements are offered to the sophisticated but non-accredited investors.
Flipping the Pages of the Private Placement Catalogue
Private placements emerge in a variety of styles. There is quite a menu for prospective private placement investors to skim through, and they’re all accessible through your Self-Directed IRA. Regardless of the category, if you choose to invest in a private placement, you could potentially help a private company garner the capital they require to grow their business.
Investments in any of the following can be structured as a private placement:
- Hedge Fund
- Private Equity Fund
- Limited Liability Company (LLC)
- Limited Partnership
A Deluxe Fit: Investing in a Private Placement with a Self-Directed IRA
Generally, private placements don’t guarantee liquidity and require an investor to wait a typical three to five year holding period before they can withdraw and receive their cash growth. To some investors this factor is less than ideal, but this exact reason is why a private placement is so fitting for a Self-Directed IRA.
Since Self-Directed IRAs are designed to help you during your retirement, an account holder usually cannot access their funds until they reach the age of 59 ½ years old. Furthermore, an SDIRA owner has usually embraced a long-term investing mindset, so this type of investment coincides with their financial goals.
Moreover, certain investing vehicles, such as 401(k)s and some IRAs backed by a considerable brokerage, cannot partake in the investing of private placements. Self-Directed IRAs are the ideal mechanism that allow for the utilization of retirement funds for an investing opportunity this unique.
The Luxurious Investment Alternative: Self-Directed IRAs
Self-Directed IRAs offer exquisite benefits in addition to the access of private placements. In a manner specified by you at the creation of your account, your money will accrue in a tax-advantaged sanctuary. If you would prefer to pay your taxes at a later date, establishing a Self-Directed Traditional IRA will let your gains grow tax-deferred. If you opt to pay your taxes upfront, a Self-Directed Roth IRA will permit your retirement savings to develop tax-free.
SDIRAs are praised for granting its owners access to a selection of alternative assets including real estate, precious metals, promissory notes, and creative pursuits or initiatives. As these assets are generally independent from the stock market’s volatility, your Self-Directed IRA can potentially hedge against inflation in conjunction with possibly reducing your risk. Adding an alternative investment into the wheel of your retirement portfolio further diversifies your savings and can also aid in mitigating risk.
Researching Prospective Private Placements
It’s considered best practice to perform a thorough due diligence on your prospective private placement. You may find it helpful to observe the business owner’s (sometimes also known as the Investment Sponsor) track record and monitor how they’ve navigated past failures and successes.
When you initially step into a private placement investment, you’ll receive documentation. For caution, you might want to double check this documentation provides all the pertinent information, including the nature of the investment, expected returns, company structure, and any notable risks that may occur. If you approve of the intricacies, then you should get answers to other quintessential questions, such as when you can expect to be able to cash out your shares, if there will be multiple share classes tied to this investment, and most importantly, if this investment makes sense for you to personally pursue.
It’s strongly encouraged that you speak with a financial industry professional to obtain their perspective on the viability of this private placement.
Starting Your Private Placement Promenade
To begin this endeavor, you’ll need to open your Self-Directed IRA. Determine which account best supports your desired investing journey. If you plan on investing your SDIRA in more than one investment and believe you’ll be holding a high-transaction account, a Self-Directed IRA LLC or Self-Directed IRA Trust could render most suitable. Both accounts are upgraded with the supercharged power of checkbook control, which lets you perform your everyday transactions without the involvement of your Self-Directed IRA custodian.
Once your account has been established and funded, you will then send your custodian an Investment Authorization form detailing where the funds should be sent. You will also forward documentation that was sent by your Investment Sponsor including Articles of Organization, Operating Agreement, and a Certificate of Good Standing, if their entity has existed for more than 12 months.
Majestic and Opulent: Let Your Retirement Lounge in a SDIRA
Private placements in association with a Self-Directed IRA give investors a rare opportunity that isn’t necessarily available to other anticipating investors. Besides investing in something you have faith in, you’re helping a smaller business expand in ways they may have never thought imaginable. While doing this deed, you’ll be growing your retirement savings alongside this small business, confirming that ultimately teamwork does make the dream work.
Are you interested in entering this potentially rich refuge? Our Self-Directed IRA Specialists are zealous in educating clients in an array of asset classes. Schedule a call with one of our specialists and start saving for your future today!
