Investing in Private Companies with Retirement Dollars

Thanks to some self-directed IRA (SDIRA) custodians, investors can now use their retirement funds to access alternative assets. Beyond traditional assets like stocks, bonds, ETFs, and mutual funds, alternative assets encompass a wide variety of investments outside the public markets — including private companies.

With an SDIRA, accredited investors now have the opportunity to invest in new companies before they reach public markets. You can start today by telling your broker that you want to use retirement money for a private company investment.

What is a self-directed IRA?

Like more conventional IRAs, SDIRAs are retirement accounts that require a custodian to hold and administer the assets. Also, like other IRAs, both traditional and Roth versions of IRAs are available — as are SEP and SIMPLE IRAs.

Where SDIRAs differ is in the level of flexibility they provide, enabling investors to include a wider range of assets, such as private equity, real estate, secured and unsecured promissory notes, and precious metals. This makes them a versatile option for retirement planning, especially for those seeking greater portfolio diversification.

How to invest in a private company with a self-directed IRA

Your broker can help you open a self-directed IRA account through Forge Trust. As a trusted custodian, Forge Trust can help you roll over any retirement accounts from your existing IRAs or 401(k) plans or make a current year IRA contribution to fund the investment, subject to IRS contribution limits.

Once your account is set up, you can authorize an investment in a private company from your IRA, and Forge Trust will handle the process to execute the trade.

Three Reasons to Invest in Private Companies Using a Self-Directed IRA

1. Portfolio diversification

   Including investments in your portfolio can enhance diversification by providing exposure to asset classes that may be less correlated with public markets. Private company investments also allow you to access emerging industries and innovative sectors that may not yet have a presence in public markets, further broadening your investment opportunities.

2. Long-term horizon

   Private company investments are typically less liquid than publicly traded stocks, often requiring a longer time frame to realize potential returns. This extended time frame aligns with the longer-term nature of tax-advantaged retirement accounts, where funds are generally intended to remain until retirement to avoid penalties.

3. Potential for higher returns

   Private company investments may offer the potential for higher returns compared to traditional investments, but they can also come with greater risk. For this reason, many investors choose to work with a broker or advisor, who can help guide them through the complexities of alternative investing and identify opportunities that align with their financial goals and risk appetite.

Important Considerations for Investing Through an SDIRA

When investing in a private company using a self-directed IRA, it’s important to understand the rules governing ownership and prohibited transactions. First, the IRA, not you as an individual, owns the private company stock. There are strict regulations in place to prevent conflicts of interest, including restrictions on the IRA owner’s involvement with the private company being invested in.

For example, you cannot own 50% or more of a company, hold 10% or more of its stock, or serve as a highly compensated employee, officer, or director. Additionally, the IRA account owner cannot purchase private stock from disqualified family members, a fiduciary, or service providers connected to the IRA.

When investing in private companies through a self-directed IRA, it’s also important to understand the role of the custodian.

As with other custodians, Forge Trust operates as a passive, non-discretionary custodian, meaning it cannot provide investment advice. This is in accordance with the amended Section 408 of the Internal Revenue Code.

If you’re ready to invest in private companies using tax-advantaged retirement dollars, work with your broker to get started with a Forge Trust self-directed IRA.