Investing in Private Entities with a Self-Directed IRA: FAQs
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 companies, 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 entities with their account.
Frequently Asked Questions: Investing in 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 qualified account:
- If you are purchasing ownership of an existing entity, total ownership of disqualified individuals (including you) cannot be 50 percent or higher
- Internal Revenue Code 4975 prohibits investments where the managing member is more than 10-percent interest owner and 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 qualified 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.
3. How does investing in a private entity with a self-directed IRA work? What’s the process?
It is ideal to have your Equity Trust account open and funded before you find your investment. Once you’ve identified your investment opportunity in a private entity such as an LLC, LP, land trust, C-Corp, or joint venture, these are the steps to completing an investment using your account:
1. Request Funds and Direct Your Investment.
- Complete and submit the Private Equity Direction of Investment Form, which can be obtained through the online account management system myEQUITY
- Send supporting documentation for LLC, LP, or C-Corp (a list of supporting documentation can be found in myEQUITY)
- Sign documentation and ensure proper titling before sending. The correct titling is: Equity Trust Company Custodian FBO [Account name IRA, Roth IRA, etc.]
2. Equity Trust Processes Your Investment Direction and Remits Money as Directed
- Your Equity Trust account now owns the investment
- Send original supporting documentation to Equity Trust for safekeeping
3. Manage the Investment within Your IRA
- You must remain at arm’s length from your IRA investment at all times and avoid prohibited transactions. Consult with your tax attorney or financial professional or reference IRS Publication 590
4. What information is needed when I request to purchase a private equity investment in my self-directed account?
The Private Equity Direction of Investment (DOI) Form outlines the information that is needed about the investment including:
- Type of entity
- Entity name and contact information
- Amount of the investment, shares, and price per share
- Percentage of ownership
- Funding instructions
- Your relationship to the entity
Entity investments also require supporting documents that provide additional details about the entity.
In addition, there is a Private Equity Representation Letter that is required to be completed and signed by the investment issuer.
Video: Investing in Private Entities with an IRA
5. How long does it take to process my private equity investment?
Private equity investments in good order are typically processed within five to seven business days of receipt. Expedited processing is available for an additional fee. Based on how you select to send the funds, there may be an additional seven to 10 business days for delivery.
It is critical to accurately complete your investment paperwork; if your paperwork is incomplete or inaccurate, your request will require extra processing time.
Entity investments may require additional review; please be aware there may be more information requested regarding your investment and could extend processing times.
Note: Some purchase requests require a verbal verification from the account holder prior to processing of the payment. Failure to complete the verbal verification will result in processing delays, including the cancellation of the request.
6. What if the company I invested in goes public?
In the instance the asset goes public, you will be required to complete a replacement that would remove the original private asset and add the public asset into your account. This would also apply to a merger or acquisition situation.
To complete the replacement, provide a Publicly Offered Buy DOI that includes the specific details of the new asset within the Exchange section of this form. This can be done in myEQUITY.
Additionally, any required documentation from the investment company that will need to be signed by Equity Trust, as well as documentation to support the replacement taking place, will need to be submitted. Delivery instructions should be directed to the investment company.
If the asset is a stock that is restricted, Equity Trust Company cannot remove the restrictions and you must work with the company that originally issued the stock.
No. This is considered a prohibited transaction (see IRC 4975).
No. IRAs are not qualified as investors in subchapter S corporations.
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