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How to Invest in Private Equity with a Self-Directed Retirement Account

How to Invest in Private Equity with a Self-Directed Retirement Account

Rocket Dollar investors can use the tax-advantaged dollars in their Self-Directed IRAs to make private equity investments, including startup capital, funding strategic growth, or restructuring capital for businesses undergoing operational reorganization.

We’ve outlined in detail how Rocket Dollar investors can use their SDIRAs to make private equity investments.

What is private equity?

Investors who fund private placements earn a share of ownership interest in companies whose stocks aren’t publicly traded. The most common form of private equity investment is in startup and early-stage companies seeking operating capital as they scale. 

Rocket Dollar investors can make these types of investments in a variety of ways, including:

  • Limited liability partnerships and limited partnerships
  • Privately managed REITs
  • Private hedge funds and funds of funds
  • Private stock, warrants, options and preferred stock
  • ETFs that consist of privately held companies

Since private equity investments usually aren’t correlated to the performance of public markets, they can add significant diversification to your retirement portfolio. They also offer long-term options to potentially generate returns well above that of public market earnings—although risk factors are greatly increased as well.

Using your Rocket Dollar SDIRA to make private equity investments

Rocket Dollar makes it easy for tax-advantaged investors to provide seed money for startups or early-stage businesses. However, there are certain steps and guidelines that must be followed to ensure your investment is done correctly and is within IRS rules for prohibited transactions and disqualified persons.

Here’s how the process works:

  1. Open a Rocket Dollar account. Signup takes just minutes and can be done entirely online.
  2. Open and fund an LLC bank account. Funds can come from rolling over qualified company-sponsored IRAs, direct contributions or other types of fund transfers.
  3. Perform due diligence. All investments made from an SDIRA come with the onus of performing due diligence. This is especially true for private placements since private companies aren’t required to file detailed financial reports for potential investors to examine. Risk should be evaluated accordingly.

Once these steps are complete, your SDIRA custodian will direct funds from your account to complete the placement process.

Important guidelines for making private equity investments from your SDIRA

Private equity investments share much common ground with IRA regulations that govern other types of alternative investments. Key IRS regulations include:

  • Using your SDIRA to purchase private stock you already own.
  • The owner of the SDIRA can’t be a general partner in the private LP or LLP.
  • You can’t be employed by the company in which you are investing.
  • All earnings must flow through the SDIRA.

Private equity investments lack the safeguards that investment options registered with the Securities and Exchange Commission provide. Therefore, it’s extremely important potential investors perform the necessary due diligence on offerings, as well as speak with a qualified financial advisor prior to making any private placements. Some things to keep in mind include:

  • Hold time (especially important for investors nearing retirement age). Private equity usually is a long-term investment horizon, and funds can be illiquid for many years.
  • The SDIRA owns the business equity rather than the investor.
  • All legal documentation must be made out in the name of the SDIRA entity rather than the individual investor.

Benefits of using an SDIRA for private equity investments

Self-Directed IRAs provide direct control of investment choices. Savvy investors can leverage personal experience and knowledge to invest in companies and businesses that fall within their realm of expertise. All these investments are made using tax-advantaged dollars and enjoy significant tax benefits.

Private equity can provide important portfolio diversification and significantly boost return profiles although returns may be nonexistent in the early years while moving to positive in the later stages of the investment. Executed correctly, private equity investments are an important asset in a well-diversified retirement portfolio.

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