If you’re like most people, your IRA probably invests in public companies in the form of stocks and bonds. But what if you could invest in companies before they go public? You can with a self-directed IRA.
It’s called "private placements" and it refers to investing in privately held entities, such as companies, partnerships, or small businesses. Banks have recently tightened their purse strings when it comes to lending to these entities, creating a higher demand for development capital from individual investors.
For the people running these entities, obtaining capital from a self-directed IRA owner can be simpler and faster than going through the loan process with an institutional lender. For self-directed IRA owners, private placements have the potential to bring higher returns than the stock market or CDs. Keep in mind, there may still be investor criteria that must be met in order to invest in a private placement.
Providing private loans to businesses is also an allowable way to diversify your retirement portfolio. Your self-directed IRA can invest in:
- C corporations
- Private stock
- Private placement memorandums
- Land trusts
- Secured and unsecured notes
Here are a few things to consider when investing in private placements:
- Before lending money or investing in a business, do your due diligence. Read more about being an informed investor.
- Some entities don’t allow investors to sell or withdraw funds for a fixed amount of time. If you are close to retirement, make sure that this will not interfere with your required minimum distributions.
- Earnings from the entity might be taxable to the IRA, even if they are not paid out.
- LLCs are considered securities in some states and may be required to meet the standards of securities offerings.
- Creating an IRA LLC will give you "checkbook control" over your retirement funds. Learn more about this strategy.
To learn more about the different ways your IRA can invest in private placements, or to make a private placement investment, please contact us for a free consult today or call toll-free at 800-392-9653.