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Have you ever considered investing in a startup or privately held company but thought this type of investing was only available to wealthy venture capitalists? Maybe you’re interested in diversifying beyond publicly traded stocks but weren’t sure if it was a possibility.
You may have access to private investments – and the funds to invest – and not even realize it.
It’s possible to use your retirement account to fund a wide variety of investment opportunities, including privately held entities and companies looking for investors.
Accounts that expend your investment potential
Through what’s known as a self-directed IRA, it’s possible to diversify beyond public stocks, bonds, and mutual funds into nearly any investment opportunity. The realm of investment opportunities can include small businesses, private equity, investment platforms, real estate, and more.
Many investors do not realize the IRS only lists a few items that are not permitted in an IRA – mainly collectibles, including artwork, antiques, and alcoholic beverages (this can be found in IRS Publication 590).
Because the investments are in an IRA, there are tax benefits. Any profits are tax-deferred (or, in the case of the Roth IRA, tax-free). In addition, investments in IRAs are not subject to short-term or long-term capital gains taxes.
Before you try to tap into your current 401(k) or IRA, there’s one other important thing to know: to truly take advantage of this investment freedom and self-direct your funds, your retirement or other qualified account must be established through a custodian, such as Equity Trust, that’s equipped to handle this type of investment.
There are a few other rules as well, due to the fact that you’re investing in a tax-advantaged account.
What do Private Entities Look Like?
Here’s a summary of different types of private-entity investments:
|Limited Partnership||A limited business organized by one or more individuals, called general partners, who manage the business and are liable for the debts of the business. Limited partners are investors in the business and are only liable up to the extent of their investment. An IRA may only make investments in an LP as a limited partner.|
|Limited Liability Company (LLC)||A business that is formed by members (which may include individuals, corporations, other LLCs, and foreign entities) who have limited liability for the entity’s debts and obligations.|
|Corporation (C-Corp)||A company owned by shareholders who elect a board of directors. The board of directors determines the direction of the company.|