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Self-Directed IRA’s
In the United States, an IRA is an Individual Retirement Account which allows individuals to put aside money for retirement. The context “self-directed” means that you have complete control over selecting investments made through your IRA. Given the tax benefits associated with these retirement accounts, directing your IRA to invest in alternative assets, such as private stock and secondary placements, offers a tremendous portfolio investing strategy.
Internal Revenue Service (IRS) regulations require that a qualified trustee, or custodian, hold IRA assets on behalf of the IRA owner. The trustee/custodian provides custody of the assets, maintains other records pertaining to them, processes all transactions, files required IRS reports, helps clients understand the rules and regulations pertaining to certain prohibited transactions, and performs other administrative duties on behalf of the self-directed IRA owner. Self-directed IRA custodians are equipped to handle the increased complexity of documentation required for transactions involving alternative investments.
The Internal Revenue Code does not describe what a self-directed IRA can invest in, only what it cannot invest in. Some of the additional investment options permitted under the regulations include real estate mortgages, promissory & convertible notes, private placements, trust deeds, stocks, mutual funds, franchises, limited partnerships, LLC’s, precious metals, private equity, equity Crowdfunding and tax liens.
Self-direction has been available since the origin of IRAs via the Employee Retirement Income Security Act of 1974. Investing with a self-directed IRA isn’t much different than investing outside of an IRA. There are three simple steps:
1. Identify Your Investment
Once you find an investment that you are interested in, you need to send the offering documents to your IRA administrator for a review the materials. They need to do their due diligence to make sure it fits the criteria.
2. Process the Investment and Request Funds
When your IRA custodian approves the investment you can fill out the investment information and submit it for funding. Once the forms are accurately completed, the funds will be sent from your IRA for the investment based on your specifications. All records pertaining to the investment (such as real estate deeds, original notes, operating agreements for LLCs) are retained by the IRA custodian.
3. Manage and Sell the Investment
Once your IRA owns the investment all expenses and profits related to the investment must come from and return to the IRA. Funds from the sale of the investment return to your self-directed IRA tax-free but remember investments held within your self-directed IRA are not guaranteed.
Investing in Private Placements Through Your Self-Directed IRA
Private placement offerings (as found in our iLIFE Capital Portal) are an asset class with many possibilities. When a company seeks or needs to grow it often requires outside capital. Prior to going public, they may issue private stock in order to attract investors. A savvy investor looking to spend retirement account dollars on a private company may do so with a self-directed IRA.
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