How to Use a Self-Directed IRA to Invest in Private Companies

A Self-Directed IRA is a bit like having your own sailboat: you get to pick the direction in which you head. But what if the trade winds are steering you to a unique investment, private companies? If you want to invest in startups or companies that aren’t listed on the public exchanges, you can definitely do that with a Self-Directed IRA. But it helps to have a “nautical map” of how to get from here to there. With that in mind, let’s explore how you can use a Self-Directed IRA to invest in private companies.

Know What You’re Allowed to Invest In with a Self-Directed IRA

Before you go full speed ahead? Make sure the company you’re investing in is allowed under IRS rules. Self-Directed IRAs give you far more flexibility than traditional IRAs, but they still come with guardrails. You can invest in C corporations, LLCs, and certain partnerships, but there are restrictions. You can’t invest in a company you or close family members own or control. That’s considered a prohibited transaction, and it can trigger taxes or penalties that eat into your retirement savings.

This is one of those times when talking to a custodian or legal advisor isn’t just smart. It’s necessary. You want to be sure the private company you’re eyeing won’t disqualify your IRA or cause trouble down the line.

Get the Structure Right

Once you’ve found an eligible private company, the next step is structuring the deal correctly. Your Self-Directed IRA needs to be the investor, not you personally. That means the paperwork has to reflect that it’s your IRA—not John or Jane Doe—buying into the company.

It’s also important to fund the investment directly through your Self-Directed IRA. If you cut a personal check and try to transfer the asset into your IRA later, that’s not going to fly with the IRS. All funds and documents need to flow through the IRA’s custodian or LLC if you’re using checkbook control.

Don’t forget to review the offering documents and ask tough questions. Investing in a private company isn’t the same as picking a few shares of stock off your brokerage platform. You’re often dealing with less liquidity, less regulation, and a longer timeline before you might see a return.

What to Watch for Over Time

Once the investment is made, you’re not done. Private companies typically don’t produce regular reports like public companies do. You’ll want to monitor the company’s performance and stay in touch with its leadership—just make sure those communications are through the proper IRA channels.

If the company issues dividends or distributions, those returns need to go back into your Self-Directed IRA. They’re part of the IRA’s growth, not your personal income. Likewise, if the company is sold or goes public, your IRA—not you—receives the payout.

Some investors also get caught off guard by Unrelated Business Income Tax (UBIT), which can apply in certain private company situations. If the business is generating operating income, especially with debt involved, that might trigger a tax bill inside your IRA.

Investing in private companies through a Self-Directed IRA can open new horizons for your retirement strategy. It’s not for everyone—it requires more involvement, more paperwork, and a stronger stomach for risk—but the potential upside can be worth it for those who are prepared.

Want to start setting sail in your own retirement “boat”? It may be time to begin. If you’re interested in launching soon, reach out to us here at American IRA by dialing our number at 866-7500-IRA.

Interested in learning more about Self-Directed IRAs? Download our free guide