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With a self-directed IRA, your investment options are not limited to publicly traded companies in the stock market. You have the ability to invest in private assets, such as private equity, private placements, or private entities, in a tax-advantaged environment.
The concept of using a self-directed IRA is new for some people, which is why we’ve compiled a list of the most common questions we hear from investors about investing in private equity or entities with their account.
Frequently Asked Questions: Investing in Private Equity or Private Entities with Your Retirement Account
1. What are the rules related to private entity investing in my account?
Some important rules to remember about investing in an entity within a retirement account:
- If you are purchasing ownership of an existing entity, total ownership of disqualified individuals (including you) cannot be greater than 50 percent
- Internal Revenue Code 4975 prohibits investments where the managing member is more than 10-percent interest owner and a disqualified individual
- Your limited partnership or LLC may be subject to Unrelated Business Income Tax (UBIT)
- UBIT is the tax on unrelated business income that comes from an activity not related to the tax-exempt purpose of the organization. IRS Publication 598 provides instruction and details on how to determine if a normally tax-exempt entity/organization is required to claim Unrelated Business Taxable Income.
- You should discuss UBIT situations with your CPA/tax advisor
- You may not invest in stock of a subchapter “S” corporation
- Any earnings from the entity must return to your retirement account
- For the complete list of rules, visit IRS.gov
2. What are the different types of entities that might offer private equity investment opportunities?
Types of entities include:
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.
A company owned by shareholders who elect a board of directors. The board of directors determines the direction of the company.