Private equity is an alternative investment available for self-directed IRAs (SDIRAs). Private equity assets are typically reserved specifically for high-net-worth individuals—accredited investors like Peter Theil and Warren Buffet. However, there are relaxed rules for certain opportunities. Now, average individuals who meet specific criteria can invest in a variety of private holdings. This article explains what private equity is and how you can invest with your IRA.
What Is Private Equity?
In general terms, private equity consists of funding from investors that is pooled together to acquire large and often lucrative assets.
Specifically, private equity and stock are available to those who invest in established private companies, distressed companies, buyouts, and other existing entities that need funding for expansion, revitalization, and growth. Venture capital is a form of private equity—which provides funds for startups and other entrepreneurial endeavors that are not yet producing much, if any, revenue.
Private investors recognize the risks but are savvy enough to understand the benefits fruitful private equity investments produce. A bonus for investors is knowing they have a direct and positive impact that helps revitalize communities and encourages creativity and innovation.
Private equity includes:
- Limited liability partnerships (LLPs)
- Private placements (shares or bonds)
- Private stock and warrants
- Private hedge funds (pooled capital)
- Real Estate Investment Trusts (REITS)
- Crowdfunding platforms
- Small businesses looking to expand
As the term implies, private equity is private and not available on the stock market or public exchanges. Private equity investments typically do not have to register with the Securities and Exchange Commission (SEC), so regulatory documents filed by public investment issuers are not available to you for these private investments. This means you’ll have to use your own knowledge and expertise in evaluating private equity opportunities to confirm their validity and potential gains. Due diligence is critical here, to protect your hard-earned wealth.
How Can I Invest in Private Equity with My SDIRA?
Private equity is an alternative investment, which is not available for typical retirement plans housed with mainstream brokers. But self-directed IRAs do allow a large pool of alternatives to the stock market. In fact, the ability to hold alternative assets is one of the primary reasons self-directed plans exist.
SDIRAs allow plan owners to choose their own retirement plan investments instead of relying on a third-party (custodian or broker) to make those choices for them.
It’s your money, after all. Why shouldn’t you be the one to determine how it’s invested?
And there are a variety of self-directed retirement plans to choose from.
Types of Self-Directed Retirement Plans
Traditional and Roth IRAs are available to self-direct for individuals. Roth IRAs are often preferred because contributions are made with post-tax dollars, and all distributions in retirement are tax free. However, there are income requirements for Roth accounts. If you don’t meet those, a traditional IRA offers tax-sheltered growth on earnings and contributions to traditional plans may be tax-deductible.
If you’re a small business owner, you can self-direct SEP and SIMPLE IRAs and solo 401(k)s. Annual contribution limits of these plans are considerably higher than traditional and Roth plans. SIMPLE IRAs and solo 401(k)s allow for an employer contribution, as well, which can significantly impact the dollar amount of yearly contributions. Thanks to the SECURE Act 2.0, Roth contribution options for SEP and SIMPLE IRAs are expanded.
And, if you’ve still got funds in an employer-sponsored retirement plan like a 401(k) at an old job, perform a rollover and move those funds into a self-directed account.
Investment income is deposited directly into your self-directed retirement plan. This requirement protects the tax-sheltered status of your investment gains and at the same time maximizes available funds for future investments.
Final Thoughts on Private Equity
Building retirement wealth your way can help you achieve the lifestyle you dream of when you retire. Private equity assets have the potential to produce a positive impact on your savings to help you reach those goals.
Advanta IRA is a leading self-directed IRA services provider with clients across the nation who invest in private equity, rental property, precious metals, cryptocurrency, and much more. If you have questions or want to learn more about private equity in your IRA, contact us today.
Additional resources on private equity and other alternative investments: