Private equity is part of the alternative asset class available to self-directed IRAs. Not long ago, private equity was reserved specifically for high-net-worth individuals—accredited investors like Peter Theil and Warren Buffet. However, those rules have been relaxed for certain opportunities, allowing average individuals who meet specific requirements to invest and potentially achieve big benefits in their investment portfolios and retirement accounts. 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 eagerly 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. An added bonus for investors is knowing they have a direct and positive impact that helps revitalize communities and encourages creativity and innovation.
Private equity options include:
- 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
- Startups
- Small businesses looking to expand
As the term implies, private equity is private and not currently available on the 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 IRA?
Private equity is considered an alternative investment and is not available for typical retirement plans housed with mainstream brokers. But self-directed plans 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 they exist.
Self-directed IRAs allow plan owners to choose their own investments instead of relying on a third-party (custodian or broker) to make those choices for them. The greatest benefit of self-direction is the ability to use alternative assets, like private equity and real estate, to build retirement wealth. 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.
Traditional and Roth IRAs are available for individuals. Roth IRAs are preferred, because contributions to the account are made with post-tax dollars and earnings withdrawn 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 401(k)s allow for an employer contribution, as well, which can significantly impact the dollar amount of yearly contributions.
And, if you’ve still got funds in an employer-sponsored retirement plan like a 401(k) at an old job, you can move those funds into a self-directed account, too.
Income earned from private equity investments 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.
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 plan provider with clients across the nation who invest in private equity and stock. If you have questions or want to learn more about private equity in your IRA, contact us today.
