The great thing about self-directed IRAs is that they give you the ability to invest in many more options than a typical IRA. What this means is that sometimes you are going to want to do your due diligence to make sure that the investment that you choose is the best option for you.
Investing in a company is a great way to invest with your self-directed IRA. One thing to be aware of when investing in a company is that there are two ways to invest. You can either give the company a loan and make a certain interest on the loan. Or you can buy some equity in the company that will give you either stock or a percentage of ownership in the company.
These two ways to invest in your self-directed IRA have some different advantages. You will definitely want to make sure you are investing in a way that makes the most sense for you.
If you decide that you would rather go the loan route, and earn a certain amount of interets in a certain amount of time, there is one thing that you need to remember. You cannot loan the money to a company that is owned or controlled by a disqualified person.
One advantage of a loan is that you will typically not be subject to Unrelated Business Income Tax (UBIT). UBIT could be assessed on an equity share of an entity by an IRA.
Private Equity Investment/Stock
One way that companies receive investment capital is by offering stock or equity. Your IRA can invest in private companies and earn a percentage of their profits based on the equity percentage that you have. Your equity can be in the form of a percentage of ownership or through company stock.
One downside to equity ownership is that it could be subject to UBIT.
Should You Choose a Loan or Private Equity/Stock?
It really just depends. While both can potentially be risky options typically choosing private equity or stock is riskier than a loan. While a loan is a safer investment it also has a little more downside as far as potential earnings. Once you have set the term of the loan, you know that as long as the loan is completely paid you will earn a certain percent. With a private equity investment or stock investment, the upside is much more unknown. You could potentially get way more return than what a loan could give you. If the company never has any profits though, a loan could be a much more attractive option because they still need to pay back that loan.
The great thing about self-directed IRAs is that all of these options are open to you. Which is a better option for you depends on what your situation. Now you know the upside and downside of a loan or private equity investment/stock. Let us help you set up your self-directed IRA so that you can invest in that company.
Author: Nick Barker