Self-Directed IRA Tips
Did you know that there is a staggering $28 trillion in retirement plans in the United States? What's even more intriguing is that these funds can be invested into your business, including start-ups, private companies, real estate, and small businesses. Surprisingly, many entrepreneurs and retirement account owners are unaware of this opportunity, despite it being available for over three decades. Consider who owns these vast sums: everyday Americans, your cousin, friend, running partner, or neighbor—people just like you. For many Americans, their retirement account represents the largest pool of investable funds they possess. Yet, most entrepreneurs have never tapped into this potential source of investment for their businesses. It begs the question: How much do you think your friends and family have in their IRAs or old employer 401(k)s? How attached do you think they are to those investments? Unlocking the answers to these questions has led to hundreds of millions of dollars being invested in private companies and start-ups. So, how many people are actually using their retirement accounts for this purpose? Recent industry surveys have revealed that around one million retirement accounts are being self-directed into private companies, real estate, venture capital, private equity, hedge funds, start-ups, and other alternative investments, including Bitcoin and cryptocurrencies. Although this number represents a small portion of the overall retirement account market, it's steadily growing in popularity. But how does it work, you may wonder? How can these funds be properly invested in your business? If you consult your CPA or lawyer, you might hear them say, "It's possible, but very complicated, so we don't recommend it." Many financial advisers might also discourage you from pursuing this avenue, fearing the loss of fees they earn from mutual funds, annuities, and stocks when you choose alternative investments. However, the process of investing retirement funds in private companies can be navigated successfully with the help of good lawyers and accountants. While there are legal and tax considerations to adhere to, seeking professional guidance can ensure compliance. One crucial aspect is understanding and addressing prohibited transactions, which restrict an IRA or 401(k) from transacting directly with the account owner or certain family members. Another important consideration is Unrelated Business Income Tax (UBIT), which applies when an IRA receives "business" income. Proper planning and structuring of investments can help avoid or minimize the impact of UBIT. To invest in a private company or start-up, the retirement account holder must have a self-directed IRA. This type of IRA allows for investments in any asset allowed by law, unlike traditional IRAs or 401(k)s, which restrict investments to their platform's offerings. To access private company investments, funds from traditional accounts can be rolled over or transferred to a self-directed custodian, like Directed IRA & Directed Trust Company, that permits such investments. For entrepreneurs seeking capital, offering shares or units in your company to retirement account owners can be an effective strategy. This approach does not require waiting until your company goes public, as you can attract investment from retirement accounts even before becoming publicly traded. Well-known companies such as Facebook, Staples, Sealy, PayPal, Domino's, and Yelp had individuals with self directed IRAs invest in them before going public. One should keep in mind that while these opportunities exist, certain rules and taxes need to be understood and followed. Prohibited transactions restrict the involvement of certain individuals' retirement accounts, while UBIT may apply in specific investment scenarios. By adhering to the rules and planning appropriately, retirement account funds can become a significant source of funding and investment for your business. Taking the time to learn how to utilize these funds efficiently can open up exciting possibilities for entrepreneurs.
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