Increase Your Private Investment Allocation With Your Self-Directed IRA

Estimated reading time: 3 minutes

Individual retirement accounts are perhaps the single most powerful tool you have in your retirement planning arsenal. You have greater control and flexibility over your retirement funds as compared to an employer-sponsored 401(k), and a Roth IRA can provide significant benefits for tax savings and estate planning purposes.

Self-directed IRAs take things a step further. Having an account with a custodian such as Quest Trust Company will allow you to invest in an even wider range of asset types, including a variety of private investments. Here are some ways to increase your portfolio allocation into these investment types by using a self-directed IRA.

Private Mortgages. Regardless of the state of the economy, people are always going to want (or need) to buy and sell homes. The IRS regulations permit you to use a self-directed IRA in order to issue private mortgages. Provided you understand the process fully, follow all legal requirements and evaluate your risks accordingly, you may find this to be a significant boost to your portfolio.

In fact, when prevailing interest rates increase and it becomes more difficult for the average home buyer to get a loan from a bank, you may have even more opportunities for making private mortgages.

Private Equity. Similarly, a self-directed IRA can be used to make private equity investments as well. Depending on the size of your portfolio and your overall financial situation, this can be a way to gain a completely unique risk/reward exposure that wouldn’t be available in any other investment you could make.

Some private equity investments will require that the investor be a so-called “accredited investor”. This is a legal term defined by the SEC to mean a person who either (1) has a net worth of at least $1,000,000 (not including the value of their primary residence), or (2) has an annual income of at least $200,000 over each of the last two years (or has a joint income of $300,000 in each year with their spouse) and a reasonable expectation to achieve the same income this year.

Note that even if you’re looking to invest with your self-directed IRA and your account meets these standards, you’ll still need to meet those standards individually.

Private Partnership Interests. You can use your self-directed IRA to invest in various types of private partnerships. These may include traditional businesses as well as natural resources development opportunities such as those that can be found in the oil and gas industries.

Remember that when you invest your self-directed IRA in a private partnership, you’re prohibited from benefitting from it individually while the investment is still held within your account. So if the partnership invests in vacation real estate properties, neither you nor your family or any other related parties can stay in the property while you’re still invested.

Regardless of the private investments you’re considering making, be sure to do your research and understand all the risks before you commit your account funds.

First Time Using Your Self-Directed IRA to Invest in Private Stock?

Estimated reading time: 3 minutes

As you look to use your self-directed IRA to broaden your investment holdings, you may come across opportunities to invest in private stock. Among many individuals, this type of investment is among the least familiar, and potentially most confusing. Let’s take a look at some of the basics about using your self-directed IRA to invest in private stock.

Let’s first make sure we understand what we’re talking about when we use the term “private stock.” In the broadest possible terms, shares of “stock” in a company represent ownership interests in that company. Depending on the type of stock the company chooses to issue, this ownership interest may include the right to receive dividends (should the company choose to pay them), to vote on certain matters relating to the company’s governance, and to receive money back in the event of a company liquidation (if there are funds available after repaying company debts and other obligations).

Most individuals who are saving for retirement are familiar with stocks in the context of “publicly traded” securities. Publicly traded stocks on those in which buyers and sellers conduct their transactions on a public stock exchange, subject to the rules and requirements of the exchange. In the United States, publicly traded stocks are also subject to a number of disclosure and informational requirements promulgated by the U.S. Securities and Exchange Commission (SEC).

The purpose of the SEC disclosure requirements is to make sure that the general public has enough information to make informed and reasoned decisions about whether or not to invest in a particular company’s stock.

But while most of the largest and well-known U.S. companies are publicly traded, other companies choose to forego access to public securities exchanges in order to avoid these disclosure obligations. In doing so, U.S. law provides that these private companies can only accept funds from investors if those investors are considered to be advanced and experienced enough that they do not need the protections afforded by the SEC disclosure rules.

The SEC uses the term “accredited investors” to refer to individuals who can invest in private company stock. Under current law, an accredited investor is an individual who either (i) has an income in excess of $200,000 for each of the last two years (and reasonably expects to have a similar income this year), or (ii) as a net worth in excess of $1 million, not including their primary residence.

If you meet the requirements for being an accredited investor, and wish to use your self directed IRA to invest in private companies stock, it’s absolutely essential that you do your research before committing any funds. This level of due diligence will be far in excess of anything you’ve done previously before making an investment in publicly traded securities.

You may also wish to consult with a self-directed IRA custodian such as Quest Trust Company in order to be sure you are following the proper steps for such a private company stock investment.