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Ownership in a private company, LLC, C-Corp, LP, etc.

Be an investor in an entity that is gathering investors to buy a high dollar asset.

Pre-IPO Companies, Crowdfunding, and much more

Private Equity Investments

The IRS allows an IRA, Solo 401(k), HSA, or ESA to acquire private equity (an ownership interest in a private company) as an asset without penalty, and while keeping the tax benefits associated with that account type.

Unlike publicly traded securities, private equity does not have public disclosure laws associated with it. Therefore, the investor can use her or his personal knowledge and experience when investing in private companies or investing in private equity through a self-directed IRA.

The IRA ownership of private equity is usually expressed in a percentage of ownership or shares of stock. You, the IRA holder, select a company in which you'd like to invest. You agree on the terms with the company, and direct us to send money from your IRA to close the deal.

Step By Step Guide to Private Equity Investment

Step 1 Open and fund your IRA – It takes New Direction Trust Company two business days to open your account once your application is in the office. Then you will fund the account with a rollover, transfer, and/or contribution. This may take several weeks, so plan for that in your timetable.
Step 2 Perform due dilligence and choose a company/entity to invest in.
Step 3 Fill out a Buy Direction Letter along with documentation of the investment – (e.g. company operating agreement, subscription agreement, private equity disclaimer, etc.) and submit it to New Direction Trust Company.
Step 4 New Direction Trust Company sends money from your IRA to the company to complete the acquisition.

Key Benefits & Considerations

  • Private equity investment is an asset that allows you to put your personal knowledge to work for your IRA.
  • Investing in private companies and investing in private equity allows true diversification of your retirement account.
  • You can choose the companies/entities in which to invest your IRA funds.
  • You can apply your personal knowledge and expertise of the private equity market.
  • You can buy, sell and exchange equity without tax consequence.
  • Your IRA may invest in the following types of private companies/entities: Start-Up Companies, Pre-IPO Companies, Limited Partnerships, Limited Liability Companies, Limited Liability Partnership, C-Corporations, Land Trusts, and more.

Private Lending vs Private Equity

Private Lending Private Equity
Investee Non-disqualified business/entity or individual Non-disqualified business/entity
Asset Documentation Your IRA and the borrower sign an agreement, often called a note, that outlines the specifics of the loan. Equity may be represented in the form of shares of private stock or an ownership percentage.
How Your IRA Makes Money The amount of interest (and points if there are any) you charge is how your self-directed IRA plan earns a profit. Earns money based upon the performance of the business, from the sale of your IRA's ownership, or through the sale of the entire business at a later date.

General Rules

  • Your IRA cannot purchase private stock that you already own.
  • The IRA holder participates on behalf of the stock that the IRA owns.
  • In most cases, neither you nor any disqualified persons can be employed by the company while an equity position is held by the IRA.
  • The IRA cannot be a general partner in an LP or LLP.
  • The IRA cannot invest into an S-Corp.
  • All investment earnings must flow into the self-directed IRA account.
  • Earnings from any private equity investment or from investing in private companies may be subject to Unrelated Business Income Tax (UBIT) if the company has earnings from debt or has earnings from the sale of products or services.

Important Things to Know

  • The IRA is the owner of the private equity, not the IRA holder. Therefore, all relevant fees and costs are paid by the IRA, and all gains must remain within the IRA until the account holder reaches legal distribution age of that account.
  • All legal documents related to an IRA-owned asset must be in the name of the IRA, not your personal name.
  • New Direction Trust Company is required to report the fair market value of the account to the IRS each year. It is your responsibility to supply this information at the end of each year.

Due Diligence

1

It is the IRA holder's role to perform due diligence. New Direction Trust Company can service a private equity investment purchase with any private company/entity the IRA holder chooses. The IRA holder researches potential companies/entities and decides when they feel comfortable making the investment.


2

When considering investing in private companies or investing in private equity, the IRA holder might consider factors like competition analysis, past performance, background check of the company and/or principals, markets, and more. Many investors choose to consult a lawyer or trusted financial professional before making a private equity investment.

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