Three Ways to Partner on Investments With Your Tax-Advantaged Account

As the saying goes, “It takes money to make money.” Nowhere is this truer than with high-value—and potentially quite lucrative—alternative investments. Private assets like real estate, private loans, and private equity have the potential for meaningful appreciation, sometimes in short periods. Further, in real estate and certain private equity investments, your dollars can be paired with debt to increase the equity return. But what options do you have besides taking out a loan? Believe it or not, your tax-advantaged plan can partner on investments with other like-minded individuals.

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Below we present three ways your self-directed plan can increase its buying power and potentially expand its range of possibilities. You are limited only by your creativity in assembling your financing sources.

Partner on Investments

As mentioned, your account can partner with others on an investment. For example, if you find a $250,000 property but only have $25,000 in cash, you can afford 10%. Other investors can supply the remaining capital on the common investment. One partner could pay the remaining $225,000 or nine other investors could chip in $25,000 apiece. There’s no limit to the number or scope of partners that an investment can have, provided the money is accounted for separately and the percentage of earnings is proportional to the percentage of investment. In many instances, you may also be able to sell your stake without affecting the other positions.

Partner on Investments with Others’ Accounts

Just as you can partner with another person, you can also partner with other self-directed accounts. In our prior scenario with ten investors chipping $25,000 each, any one of them can join you in using their tax-advanced plans to buy their stakes. Nothing would change from your standpoint except you would be in good company with a fellow self-directed investor!

Partner on Investments with Yourself

Keeping with our $250,000 property example, let’s say your self-directed IRA has $25,000 and you have $50,000 in personal money. Your IRA can buy a 10% stake and you can separately buy a 20% stake as a personal investment. You can even partner with your own self-directed accounts if you keep the money separate for each respective account. You cannot retain earnings attributable to either account’s investment, nor may your account benefit from your personal investment or the other account’s investment.

Prohibited Transactions and Financing Partners

“Aren’t there a series of IRS rules that prohibit me from self-dealing?”

Yes, these rules exist, but they are designed to prevent an account holder from deriving direct benefit from or providing direct benefit to the account itself. They do not, however, prevent you from partnering with other accounts you own or others, even disqualified persons, in the context of receiving benefit through usage. Importantly, because each investor has their own independent position in the asset, an account holder and his or her account can work side by side rather than one benefiting illegally from the other. As partners, you and your account(s) would be regarded as individual investors even if you share an asset.

Questions?

Don’t hesitate to access your Client Portal and send us a message with any questions we can help you with. You can also give us a call at 877-742-1270.

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