Investing in Private Placements with a Self-Directed IRA

Self-directed IRAs offer a few more investment options than typical IRAs, one of these options being private placements. Private placements are investments in privately owned companies, rather than public companies that are registered with the Securities and Exchange Commission. A few examples of private placement investment opportunities include those with:

  • Limited Liability Companies (LLC)
  • C corporations
  • Start-Ups
  • Small businesses
  • Limited Partnerships (LP)
  • Hedge Funds
  • Land Trusts
  • Secured (deeds of trust) and unsecured (not backed by collateral) notes

These types of investments rely on individual investments to raise funds since many banks restrict loans to these businesses. Investors have the potential to earn much more on their investment than with “safer” stocks, bonds, and mutual funds. Private placements can also help diversify an investor’s portfolio, which may or may not be advantageous depending on how close the investor is to retirement. Generally, the closer an investor is to retirement, the riskier investments should decrease while the safer investments increase to ensure they have enough funds for retirement.

What are the Restrictions on Private Placements?


Not everyone can invest in a private placement. There are certain criteria that must be met before investing to help manage the risks involved. A few of these criteria are explained below.

  • Investor cannot work for the business that their IRA funds.
  • IRA owner cannot own 50% or more of the business if it is an existing entity.
  • Accredited investors must have a net worth of $1 million.
  • Accredited investor must show an income more than $200,000 ($300,000 with a spouse) from the past two years and be expected to earn at least that much in the next year.
  • If investor doesn’t meet accredited investor criteria, they can still invest as a non-accredited investor.

What to Know Before Investing in Private Placement


Just because private placement investments inherently carry more risk, it doesn’t automatically mean they are all “bad” investments. There are, however, a few best practices you should exercise to protect yourself from dangerous, or even fraudulent, private placement investments.

First, conduct thorough research on the company offering the investment opportunity. Understand their industry and the competition, and evaluate the reasonableness of their claims and expectations. Obtain a copy of how the company plans on using the funds raised. Carefully review any offering documents and familiarize yourself with the terms of the investment. Pay special attention to transfer restrictions, when proceeds will be paid back to the investors, and the difficulty of selling or reselling your investment. Some private placements take years before investors can sell or resell, so you will want to make sure the timeframe is in-line with your retirement goals. Lastly, discuss the investment with your broker to see if it makes sense to add this type of investment to your portfolio. They will also provide their expertise on the riskiness of the investment, and may also conduct deeper research into the business itself on your behalf.

Private placement investments may not be beneficial for every investor, but they can reap higher returns than other standard IRA investments. Private Placements are investments worth investigating, especially for investors who are far away from retirement or who need to balance their portfolio with a higher-return investment.

Five Common Misconceptions of a Self-Directed IRA

The self-directed IRA account is becoming the new norm for those individuals who want to play a more active role in their retirement funding. With so many resources out there it can be hard to weed through the information to find the truths about how to properly direct your own IRA account. Today, we’re going to look at five common misconceptions that individuals have about self-directed IRAs. Let’s jump in below.

1.) You Must Possess An LLC To Invest 

This is simply not true at all. You don’t need to be an LLC investor to invest in your own self-directed IRA fund. In fact, this could potentially cause major problems later down the road. You should realize that setting up an LLC to invest in a self-directed IRA is a marketing tactic that firms are using to get consumer business. They market that consumers need an LLC to set up their IRA and the company offers a secondary service of setting up the LLC for the consumer. Don’t get caught up in this trap as you absolutely don’t need an LLC to invest in your own self-directed IRA.

2.) They Require Specialized Tax Forms 

The word taxes tends to scream complicated for individuals and business owners alike. When it comes to a self-directed IRA fund you don’t have to worry about any complicated or specialized tax forms. This type of IRA basically functions as the other types when it comes to tax reporting. Those who have a self-directed IRA account need to report their annual contributes to that account on each year’s taxes. The only other time you will be responsible for reporting anything to the tax agencies on your personal return is when you distribute the funds of your IRA account for non-investment purposes.

3.) They’re Difficult To Setup 

Again, this is another myth setup by the companies that offer IRA setups. Self-directed IRAs can be easily setup by the individual owner at any time. There are many online websites you can use to setup your IRA account within a few minutes. It doesn’t take knowing a plethora of financial terms in order to establish your own self-directed IRA account.

4.) They Have The Same Investing Options As Standard IRA Accounts 

This is simply false. When it comes to standard IRA accounts, your only options are bonds and stocks. While there may be various options to choose from, there is a restriction of your investing to the options on Wall Street. With self-directed IRAs, you can invest in other endeavors such as private businesses, tax liens, gold, and real estate. There are so many options with self-directed IRAs that you simply can’t get with standard IRA accounts.

5.) You’ll Be Penalized When Switching From A Standard IRA Account 

When you switch from a standard IRA account to a self-directed IRA account you won’t be charged a penalty if you do it correctly. You need to roll your existing IRA account into your new self-directed IRA account. This will prevent you from paying any penalties. If you instead withdraw the funds from your standard IRA account and use them to open a new self-directed IRA account, you will be penalized due to the early withdraw.

Understanding more about self-directed IRAs can allow you to better grasp just how convenient these accounts are. As you can see by the list above, there are many common misconceptions out there about these types of accounts. We encourage you to do your research instead of just going by word of mouth.

Why You Need a Self-Directed IRA

There are many reasons why you should be contributing to a retirement account as soon as you start working. However, a typical IRA can feel restrictive as it generally only invests in stocks and bonds. While this may be helpful for many people, it may not result in optimal returns. What are some other good reasons to have a self-directed IRA?

Invest In Whatever You Want

Perhaps the best reason to have a self-directed IRA is that you can invest in whatever you want. This means that you can invest in oil futures, startup businesses or even your own company. You could also choose to use the proceeds from a self-directed IRA to buy real estate or land for development.

You Are the Trustee of the Account

With a self-directed IRA, you are generally the trustee of the account. Therefore, you have complete control over where the funds in your account go. All you have to do to make an investment is write a check from that account when you are ready. With a traditional IRA, a bank or financial institution acts as the trustee, which means that it has final say over how your money is used.

Only You Know Your Goals and Risk Tolerance

Having control over your retirement account is ideal because only you know your risk appetite as an investor. Furthermore, you should be allowed to invest in products or companies that you understand best. If you happen to understand real estate better than the bond market, being forced to keep money in bonds may lower returns. Over the course of 10, 20 or 30 years, even small reductions in annual return could reduce your nest egg by thousands of dollars.

Contributions Can Reduce Your Tax Burden

Contributions to a self-directed IRA may be used to reduce your taxable income for the year. This may be a powerful way for the self-employed to save money today while helping to secure their financial future. Like a traditional IRA account, you can contribute up to $5,500 of self-employment income if you are under the age of 50. If you are over the age of 50, you may be entitled to contribute an extra $1,000 per year. Talk to your tax adviser before making a contribution if you have any questions about how it impacts a future return.

Costs to Run the IRA Are Lower

Whenever someone else manages an account for you, that person or entity will charge a fee. When you run your own retirement account, you won’t charge yourself a management fee. Furthermore, there is less paperwork and fewer reporting requirements, which means that you will spend more time finding investments and less time with administrative tasks.

If you have self-employment income, you need to have a self-directed IRA. It offers tax benefits, flexibility when it comes to what you can invest in and is allows total control of your money. By investing in what you love and understand, the odds are better than you can achieve your retirement goals.

The Difference between Conventional and Self-Directed IRAs

An IRA is one of the most effective tools that you have in your quest to secure a financially comfortable retirement. In addition to offering compounding returns over your lifetime, it also offers several tax advantages. Typically, a bank or other financial institution will control your IRA investments. However, with a self-directed account, you decide how to save for retirement.

Self-Directed Accounts Allow You to Be the Trustee

As the name implies, a self-directed account allows you to decide where your contributions go. This means that you can invest in startup businesses, gold or anything else that you think will earn a return on your investment. At the same time, you get the same tax advantages as you would with any other IRA. 

Who Can Have a Self-Directed Account?

Those who have self-employment income can have such an account. The good news is that anyone can have self-employment income without quitting their day job. If you babysit for your neighbor’s kids, walk dogs, or write articles for money, that may be enough to qualify. If you are curious as to whether you have self-employment income in a given year, don’t be afraid to ask a tax professional before opening an account.

Are There Limits to How Much I Can Contribute?

The same contribution limits apply regardless of what type of account that you have. For 2017, you can contribute up to $5,500, and catch-up provisions allow those over the age of 50 to contribute another $1,000 in a year. If you make less than $5,500 in self-employment income in a given year, you can contribute that amount instead. Contributions to your self-directed IRA will also be reduced by any contributions made to other accounts. 

Withdrawal Rules are Also the Same

If you decide to take money out your account before the age of 59 ½, you may be subject to early withdrawal penalties. You will also lose the ability for that money to compound until retirement age. Furthermore, income taxes will need to be paid on any cash withdrawn prior to age 59 ½, and the withdrawal may bump you to a higher tax bracket.

Conventional IRA Accounts Limit Investment Opportunities

A typical IRA will allow you to invest in stocks and bonds. In some cases, you will be allowed to invest in gold or other precious metals. This can be extremely limiting if you don’t understand how the stock market works or don’t want to deal with low bond yields. Depending on where you have your IRA, you may be paying management fees for trading decisions that you likely could make on your own. 

If you are looking for a way to take control of your retirement, a self-directed IRA may be the best option for you. The freedom to invest in what you know and love can make it easier to get higher returns without necessarily increasing your risk. Earning higher returns may make it easier to retire sooner because you will have the financial security to do so. 

Planning to Maximize Your Self-Directed IRA Contributions Next Year

Self-Directed IRA ContributionsPerhaps the single most important factor to achieving success when it comes to building a large retirement nest egg is that you contribute to your retirement accounts consistently over many years, and contribute as much as possible as you can each year. Even if you don’t always do a great job at choosing your investments, you can still secure your financial future by maximizing the amounts you save.

For the 2015 tax year, for example, you can contribute up to $5,500 to your self-directed IRA. If you’re age 50 or older, then your contribution limit is $6,500. Unfortunately, many individuals don’t have this amount of money readily available to contribute in a single lump sum. So, in order to maximize their annual self-directed IRA contribution, they need to make a plan.

The details of everyone’s plans are going to be different, but there are some general principles that apply to nearly everyone. First of all, it’s important to understand that, subject to any minimum contribution amounts that your custodian may require, you can break up your $5,500 (or $6,500) contribution amount into multiple deposits. You could, for example, plan to deposit approximately $500 each month, and build that amount into your household budget.

This can be an important way to ensure your financial success, and generally works better than trying to accumulate a large deposit amount in your savings or checking account before making the full self-directed IRA contribution at the end of the year. In fact, there are a couple different ways that the many smaller contributions over time approach are preferable.

First of all, the earlier you can make contributions each tax year, the more time your money has to grow. It might not seem like much, but the small amount of earnings and/or growth you can gain from having an additional three, six or even 12 months every single tax year can really add up.

Furthermore, if you contribute some or all of your annual self-directed IRA in January or February of the particular tax year, then you don’t have to avoid any temptations to spend it on other things. Unlike a traditional savings or checking account, you can’t change your mind and withdraw funds from a self-directed IRA early – at least without having to pay a penalty in most cases.

Finally, saving early in the year, or throughout the year, will reaffirm a healthy savings habit and let you build on those good behaviors. Developing a plan to maximize your self-directed IRA contributions each year can carry over into other areas of personal finance, including saving for your children’s college education, saving for a down payment for a new home, or for any other long-term financial goals you may have.