August 4, 2023

Using a Self-Directed IRA (SDIRA) for Private Equity Investing

Written By: Daniel Gleich 

Key Points 

  • A Self-Directed IRA (SDIRA) allows you to invest in private placements such as private equity funds, expanding your investment options beyond those offered in standard IRAs.
  • Private equity funds are exciting opportunities for your retirement portfolio’s diversification and potential growth.
  • Due diligence and professional guidance can help you proceed with confidence when investing in private equity with a Self-Directed IRA.

With a Self-Directed IRA, you can break free from the limitations of standard IRAs and explore alternative assets. Private equity investing is now more accessible and personalized than ever before. In this article, we'll explore how a Self-Directed IRA allows individuals to invest in private equity, opening doors to unique investment opportunities beyond publicly-traded private equity stocks and exchange-traded funds (ETFs).

Private equity business concepts in front of a royal blue suit and tie

Private Placements: Explore the Possibilities

A Self-Directed IRA provides you with the flexibility to invest in various types of private placements. Private placements encompass a wide range of investments, including startups, crowdfunding ventures, real estate, small businesses, hedge funds, and private equity funds. These opportunities enable you to diversify your portfolio beyond Wall Street and invest in assets with higher growth potential. Learn more about investing in private placements with a Self-Directed IRA.

Private Equity Funds: Consider the Potential Benefits

Private equity funds pool capital from multiple investors to acquire ownership in private companies or other private assets. These funds are managed by professional investment sponsors who aim to generate returns by actively managing the investments within the fund. With a Self-Directed IRA, you can use your retirement funds to participate in these opportunities and possibly profit from the expertise of seasoned investment professionals.

Investing in private equity funds with a Self-Directed IRA offers several potential benefits. First and foremost, it can provide access to investments that are not available through standard retirement accounts. Additionally, private equity funds often involve companies in the growth phase or undergoing significant transformations, which can possibly lead to substantial returns. Furthermore, private equity investments can provide diversification by adding an asset class that is typically uncorrelated with Wall Street products. Lastly, any potential gains from private equity investments held in a Self-Directed IRA can grow tax-deferred if it’s a Traditional IRA or tax-free if it’s a Roth IRA.

Benefits of Investing in Private Equity Funds with a Self-Directed IRA Infographic: (1) Diversification – Self-Directed IRAs allow account holders access to investments that are typically not available in standard retirement accounts such as private equity funds, real estate, and precious metals. (2) Potential for Substantial Returns – Private equity funds typically involve companies in the growth phase or undergoing significant transformations, which can potentially lead to a high return on investment. (3) Potential to Reduce Investment Risk – Private equity funds are typically uncorrelated with Wall Street products, thus creating a balanced retirement portfolio. (4) Tax Advantages – Gains from an investment in a Self-Directed IRA can grow tax-deferred (Self-Directed Traditional IRA) or tax-free (Self-Directed Roth IRA).

Due Diligence: It’s Crucial

It's important to understand that private equity investments are typically illiquid and require a long-term investment horizon. Therefore, it’s important to conduct thorough due diligence before placing an investment in a particular private equity fund. Due diligence can include research on the fund manager and the fund's investment strategy as well as track record and fee structure. Once you have a general understanding of a fund’s personnel and operations, you can then begin to dig deeper with specific questions so you can ultimately arrive at an investment decision.

Self-Directed IRA completing a transaction and signing paperwork virtually on a laptop to invest in an alternative asset.

When investing in private equity through a Self-Directed IRA, certain paperwork is required to facilitate the transaction. The specifics may vary depending on the investment and the Self-Directed IRA custodian. For private equity investing with a Madison Trust Self-Directed IRA, you’ll need a private placement memorandum and subscription outlining the nature of the investment, company structure, expected returns, and potential risk factors, along with our investment authorization form. If a private placement memorandum is not available, you can submit the investment authorization form accompanied by the company’s Operating Agreement, Articles of Organization, and Certificate of Good Standing (if applicable). Learn more about how the investment process works.

Investing in private equity through a Self-Directed IRA can be an exciting way to save for retirement and get more mileage out of any potential gains. If you're interested in exploring the possibility of using a Self-Directed IRA for private equity investing, contact Madison Trust today.

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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