Private Placement Investment Using a Self-Directed IRA

Most investors are aware that their tax deferred retirement account can invest in stock with publicly traded firms however at this time most investors remain unaware of the fact that they can invest IRA/401(k) funds into private placements. ‘Private placement’ is the term that refers to investing in a company or investment that is not publicly traded and offered through one of the major exchanges. Transactions involving the purchase or sale of such investments are not available on the New York Stock Exchange or the NASDAQ. As a result, most banks and brokerage firms will not allow their IRA/401(k) clients to hold private stock investments.

Self-Directed IRA

This restriction is an institutional restriction; not an IRS restriction. There is nothing prohibiting an IRA/401(k) from holding a stock in a privately held company. That said, investors will find that there are relatively few companies that are willing and capable of holding this type of asset. Generally speaking to hold a private placement investment inside a retirement plan the investor will need to set up a ‘self-directed IRA’. A self-directed IRA is a retirement account in which the client determines what investments will be purchased/held. This is different than an account with a wealth manager or brokerage firm in which an advisor assists in making the investment decisions. Most IRA/401(k) providers limit their clients to investing in products that they specialize in holding (generally publicly traded stocks, bonds and mutual funds). To invest outside of the market into alternative assets you will need a well respected self-directed IRA provider.

Tax Deferred Investment

Like any investment within a retirement plan the growth of the account is tax deferred (or in the case of a Roth IRA potentially tax-free). The benefit of investing through an IRA or 401(k) is that the retirement account will not have to pay capital gains taxes upon the sale of the stock. Additionally holdings in privately held companies can help diversify a portfolio heavily weighted toward public market investments.

Some Restrictions Apply

It should be noted that there are IRS rules in place that prohibit investors from investing in privately held companies that they personally own or control. These rules come from IRC section 4975.  Generally speaking, you cannot invest your tax deferred IRA/401(k) into a company or entity of which you directly or indirectly control 50% or more. Prohibition rules also apply to direct lineal family members of the IRA holder (spouse, parents, grandparents, children and grandchildren). In addition, the investment may be subject to other IRS rules. Please consult a tax professional for guidance.

3 Easy Steps

The self-directed IRA process has three steps: 1-set up an account 2-move existing retirement funds to that account 3- direct self-directed IRA custodian to facilitate that investment for the IRA.

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