Self Directed IRAs offer investors the opportunity to diversify their retirement portfolio outside of Wall Street. Retirement funds can be placed into privately held companies such as LLCs, private equity funds, hedge funds, and small businesses.
Private placements typically have a 3-5 year holding period before an investor can cash out or liquidate their position. This holding period encourages the use of IRA funds (rather than personal funds) for private placement investing. While it’s important to have real time access to personal assets, retirement assets can be “locked up” for a period due to IRS imposed inaccessibility. In most cases the retirement funds may not be accessed until retirement age at 59.5. Additionally, savvy investors understand that many private placement investments have a high risk/high reward ratio, and would like to see any possible appreciation take place in a tax-advantaged account.
Public companies are traded on the open market and are regulated by the Securities and Exchange Commission. Private Placements are not as highly regulated and generally require investors to be accredited because of the additional risk involved. Before investing in a private placement, investors are encouraged to perform thorough due diligence and consult with a financial professional to determine whether the investment is a good fit for their financial situation.
Investment sponsors provide paperwork to their investors outlining the details of their offering. For LLCs, Articles of Organization and an Operating Agreement are provided. For funds (such as private equity funds or hedge funds), a Private Placement Memorandum and Subscription Agreement are prepared by the investment sponsor. These documents outline:
- nature of the investment
- company structure
- expected returns
- risk factors presented by the investment
Madison Trust has streamlined the investment process, making it easier than ever to invest IRA money into privately held businesses.
IRA ownership in a private placement is titled as follows: “Madison Trust Company Custodian FBO [your name][Madison account #]”.
The following documents, along with an Investment Authorization, are required by Madison Trust Company for private placement investments:
LLC Minority Interest:
- Articles of Organization
- Operating Agreement
- Certificate of good standing (if entity exists for more than 12 months)
- Subscription Agreement
- Private Placement memorandum