INVESTMENT GUIDE
Private
Equity
Build a stake in the next big start-up through private stock offerings or crowdfunding platforms.
AT A GLANCE
What should you know about Private Equity?
The IRS allows an IRA (Traditional or ROTH, SEP or SIMPLE), Solo 401(k), HSA, or ESA to acquire private equity (an ownership interest in a private company) as an investment while keeping the tax benefits associated with that account type. The ability of your IRA or HSA to invest in a private company gives you the opportunity to exercise your personal market knowledge and investment expertise.
Investing in a privately owned business or entity with your IRA may sound unfamiliar since most IRA providers only allow account holders to purchase publicly traded stocks, bonds, and funds as investments. However, private equity is an available asset to your retirement plan with New Direction Trust Company
The returns of a private equity investment can generate retirement wealth that is tax-deferred or tax-free depending on the account type. The IRA ownership of private equity is usually expressed as a percentage of ownership or shares of stock.
Investing in private equity as an asset in your self-directed IRA is one way to diversify your retirement portfolio. Unlike publicly traded securities, private equity does not have public disclosure laws associated with it. Therefore, the investor can use personal knowledge and experience when investing in private companies or private equity with a self-directed IRA. Investors can also combine their IRA funds with other sources of funding in order to
participate in the purchase of a hard asset like real estate or an ongoing business.
You, the IRA holder, select a company/entity in which you’d like to invest. You agree on terms with the company and direct us to send money from your IRA to close the deal. We make sure that the paperwork substantiates that the private equity investment is owned by your IRA, and therefore deserves the tax benefits associated with the account type.
INDEPENDENCE
DIVERSIFICATION
CONTROL
TAX-ADVANTAGED
Investing in private equity can take place with many types of entities*:
- Limited Partnerships
- Limited Liability Companies
- Pre-IPO Companies
- C-Corps
- Limited Liability Partnership
- Land Trusts
- Franchise Businesses
- Start Ups (banks or companies)
*An IRA can’t invest in an S-Corp, nor can it be a General Partner in a GP.
IRC Section 4975 Considerations
All IRAs have a list of people who are disqualified from certain interactions with that account. Below is a graphic that delineates which family members are disqualified. Keep in mind that any entity that is owned or controlled by a Disqualified Person is also disqualified.
DISQUALIFIED PERSONS INCLUDE:
- Your IRA cannot purchase a private equity investment from you or any Disqualified Person, nor can your IRA sell an investment to a disqualified person.
- Neither you nor a Disqualified Person can guarantee a loan for an IRA owned company.
- Disqualified Persons are not allowed to be paid by the IRA.
- If the IRA owned company has acquired real estate, neither the IRA holder nor any other. Disqualified Person to that IRA may live in or use the property. Disqualified Persons cannot work on the property, for free or for pay. “Sweat equity” is not allowed. Any remodeling, repair, improvement, and even maintenance must be performed by a non-disqualified person or entity.
THE PROCESS
How to invest in Real Estate with your
self-directed account
STEP ONE
How to Open a Self-Directed Account
The first step is to complete our online application. This will allow us to create an account number and provide you with access to our online Client Portal so you can easily manage your profile and future investments.
A member of our business development team will be in touch shortly to walk you through how your will fund your account and what we need to initiate your first investment.
STEP TWO
How to Fund a Self-Directed Account
You have essentially two ways to fund your account:
- Contribution
- Transfer/Rollover from another financial account
One thing to keep in mind if you are planning on rolling over funds from an employer-sponsored 401(k) is that not all plans will allow you to take an in-service rollover, which means you may not be able to move over any assets into an IRA without taking a distribution.
STEP THREE
How to Invest in
Private Equity
Once your account is funded, you will perform due diligence to find a business you believe in and assemble the necessary documents.
Investment Documents must follow these guidelines:
- All investment documents must be titled in the name of the IRA, not your name personally: NDTCO as custodian, FBO John Doe Roth IRA
- Investor’s signature line left blank.
- Your signature as “Read and Approved” in the margins
Don’t worry if this seems confusing! We will walk you through each of these steps and communicate directly with your sponsor and depository to make your purchase as easy as possible.
STEP FOUR
How to Manage Your Account
Our online client portal combines human power and digital innovation. making it simple to view all your account information in one centralized location, giving you the ability to directly message our support team, review recent transactions, download account documents, and review a vast library of educational content easily and securely.
Simply log into our Client Portal to access and manage all of your account information.
Titling Instruction/Buyer Information
- Wire instructions or check delivery instructions
- Subscription Agreement or Stock Purchase Agreement (provided by the issuer, reviewed by NDTCO)
- New Direction Trust Company’s address as that of the investor
- The IRA’s Tax ID Number – 20-0157510
- Number of shares or percent membership
- Price per share/unit
- Total purchase price
- Investor’s signature line left blank*
- Your signature as “Read and Approved” in the margins
*The name in which the interest is to be held is: NDTCO as custodian FBO Client’s Name IRA
FAQ
What fees are needed to open an account?
A one-time $30 account opening fee is due at the time the account is established. You will then find a business you believe in, complete the necessary
paperwork, and fund your private equity investment! You can view our full fee schedule here.
Which accounts are eligible?
Eligible NDTCO account types include
- Tradition IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Solo 401(k)
- HSA
How does cash flow work?
All earnings from private equity investments flow directly back to the IRA. At that time, the account holder decides how to reinvest that money. Plan ahead and make sure the IRA has sufficient funds to cover related expenses. If you expect future installments or capital calls, plan to fund your IRA accordingly.
In the event you would like to transfer or distribute all or part of your IRA investment in the future, make sure the entity in which you would like to invest will allow the ownership to be assigned or reassigned. Keep in mind that some investments do not allow the investor to sell ownership units or withdraw funds during a fixed period. (If you happen to be 72 or over and have a traditional IRA, this may affect your ability to take your mandatory
distributions from the account.)
Can NDTCO help me invest?
Because neither the IRS nor NDTCO researches nor endorses any investments, the IRA holder is responsible for performing due diligence on all investments. Visit our website for more information on due diligence and ways to protect yourself from investment scams. A competent professional in the legal, financial advice, or accounting fields can also be engaged if you need additional help. Any of these legal professionals can assist in deciding if the investment being considered is legitimate, meets your risk tolerance parameters, and is right for your investment goals.
What about Capital Calls & Additional Funding?
A capital call, installment, or additional funding is very similar to the initial purchase process. Should your Private Equity IRA investment require a capital call or additional funding, New Direction Trust Company can assist with the process. Please note that additional funding depends on whether or not the operating agreement of the company allows for it. Please contact our offices with any questions regarding this matter.
Are there Fair Market Valuation requirements?
The IRS requires an annual fair market value for each asset. Each year you will request a market value (or a statement as to the value of your asset if sold on the open market today) and supporting documentation from the entity’s manager. It is important for the integrity of your account that your assets have an up to date valuation.
Does UBIT apply?
Earnings from certain investments may be subject to Unrelated Business Income Tax or UBIT. The IRA pays this tax, not you personally. Consult with your tax professional to determine if UBIT is owed. If so, you would file a form 990-T with the IRS for your IRA. If your tax professional is unfamiliar with filing form 990-T, a sister company of New Direction IRA, IRA Tax Services, is available to help at 303-604-6466.
What exactly is UBIT?
Unrelated Business Income Tax applies to debt financed property in IRAs and also applies to operating income received from companies owned by IRAs and qualified plans. Typically the debt financed income is taxable under UBIT rules for the percentage of property that is debt-financed.
OTHER INVESTMENTS
The world is your portfolio
Why stop at precious metals? With a self-directed account, you have the freedom to invest your tax-advantaged retirement or savings funds in the assets you’re most passionate about.
From start-ups to small businesses, if you can find it, we will help you fund it.
EDUCATION CENTER
Want to learn more about Private Equity investments?
Precious Metals Guide
