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 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.|
|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.|
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.
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.