Using a Self-Directed IRA to Invest in a Private Company

The Internal Revenue Service puts few restrictions on what assets you can own in an individual retirement arrangement. You can’t use your self-directed IRA to buy life insurance, collectibles, jewelry, alcoholic beverages or some forms of precious metals. But there’s nothing in the law that says you can’t buy an interest in a closely held corporation or limited liability company, and you can even own the entire enterprise within your IRA. However, a number of special rules apply.

Identify a custodian

This is a business that is separate from you that is willing to hold the assets you elect to buy in the name of your self-directed IRA. They are frequently referred to as “third party administrators” and sometimes as “trustees.” They must be specifically authorized by the IRS to act in this capacity. Not every financial services company or provider qualifies, and this is a specialized area of financial planning, so ensure you are working with someone experienced with self-directed retirement accounts.

Open an account with the new custodian

Once you’ve opened the account, fund it with new contributions (up to $6,000, as of 2020), or execute a trustee-to-trustee “rollover” transfer, directing your old self-directed IRA to transfer assets to the new self-directed IRA with the new custodian. Your custodian will be able to provide you with the required forms.

Identify the business in which you want to invest

You can invest in any business, domestically or abroad, as long as it’s not owned or controlled by you, your spouse, any of your ascendants or descendants, their spouses, any entities they control or any fiduciary advising you on your self-directed IRA. For example, your broker or lawyer cannot solicit you to buy shares in their own companies. You can buy a fractional interest in a corporation, LLC or partnership, or you can buy the whole thing.

Direct your custodian

Specify the purchase price, the counterparty, the number of shares (if a corporation) or the percentage of interest (if an LLC or partnership). Verify that the transaction has been completed correctly.