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Convertible Notes in IRAs Let Investors Swing for the Fences

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  |  By Christopher Orr, SDIP

In a world where everyone is trying to identify the next startup to take off, a growing number of investors want to get in on the ground floor. One of the most popular ways to do that is through a convertible note.

Convertible notes are loans that start out as debt, and then eventually convert into equity when the company is more established. They’re often used in a startup’s seed funding round, when it’s still too early to properly value the company. The structure is beneficial to both parties – the company gets to offload its debts once the note converts to equity, and the lender gains equity in the company at a better price-per-share than other investors purchasing straight equity.

So where can investors find these convertible stock deals? In my last post we spoke about the advantages of using angel investing groups to help to find startup investments for your self-directed IRA. Not only are these networks a great place to find new opportunities, but they also represent a variety of different investment vehicles, including convertible notes.

Here at PENSCO we see all kinds of loans and debts, and we’re no strangers to the convertible note. Clients like that they have the potential to hit a homerun as opposed to simply receiving interest, as they would on a traditional debt instrument. And, like all self-directed IRA investors, our clients love the fact that they can use their retirement dollars to invest in something they’re passionate about – companies with high growth potential.

When you’re investing through a self-directed IRA, convertible notes are held to the same regulations and prohibited transaction rules as all other loans and debt instruments. The number one question I get from clients is,“Can I invest in a note issued by my own company?” It depends on the details, but most of the time the answer is no. The IRS considers this giving a loan to yourself, which is known as “self-dealing” and is an IRA no-no as far as the IRS is concerned. There are situations where this may be possible, but it will depend on the role you play with the company and the breakdown of ownership percentage between your IRA, your prohibited family members and you. Bottom line: if you want to invest in a convertible note through your IRA, do it with a company that you don’t own.

Like all private equity investments, convertible notes come with heightened risk, and it’s up to every investor to do his or her due diligence before investing in anything. And, like you, PENSCO has to do its due diligence as well – you can find our convertible note authorization here. Once all the review documents have been gathered and accepted, you can make your convertible note investment using the tax shelter of your self-directed IRA.


This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.