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PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

Raising Capital? Discover the Potential of Self-Directed IRAs

  |  By Curtis Glovier

It’s a typical founder’s dilemma: you have an excellent idea for a new company, but now you’ve hit a roadblock when it comes to raising capital. You may have already reached out to friends, families, and angel investors to raise capital or perhaps you’re bootstrapping your startup with personal savings and cash advances. 

But there’s one very large source of capital that entrepreneurs and small businesses almost always overlook when raising capital: retirement funds.

Americans held more than $9.5 trillion in individual retirement accounts (IRAs) as of the third quarter of 2018, according to the Investment Company Institute. Research firm Cerulli Associates predicts that aging baby boomers will push assets held in IRAs to almost $12 trillion by 2022. 

Most of these retirement dollars are invested in traditional assets like stocks, bonds, and mutual funds. But IRA owners can allocate their retirement assets well beyond plain vanilla investments. The law only restricts IRA owners from investing in life insurance and collectibles. That means IRA investors who self-direct their retirement account can invest in everything from private equity to real estate to potentially your latest business venture.

Self-directed IRAs: A potential source of start-up capital

The Retirement Industry Trust Association (RITA) estimates that self-directed IRAs represent 3% to 5% of total assets held in IRAs. That translates into $285 billion to $475 billion of assets that can be invested in alternative assets. At PENSCO, our clients tell us that diversification and the inherent tax-advantaged nature of IRAs are the leading reasons why they use retirement funds to invest in startups, new funds, and small businesses.

Self-directed IRAs may be an attractive source of funds for entrepreneurs raising capital for multiple reasons:

  • Retirement funds tend to be held for extended periods. This can make them a good match for funding new business ventures, which typically require longer holding periods.
  • If IRA owners take withdrawals from their account before turning 59½, they often face penalties. The result is that many IRA investors reinvest their earnings, which may act as a source of ongoing capital for entrepreneurs.
  • Investors who have already invested with you through a taxable account can also invest with you using their self-directed IRA. This means one investor may potentially be able to draw from two different sources of capital to fund your opportunity.

Ready to raise self-directed IRA funds?

Entrepreneurs who are interested in raising capital from IRA owners should seek the assistance of an alternative asset custodian, financial professional or tax lawyer to determine if their investment opportunity is eligible to accept IRA funds.

There are specific IRS rules and regulations—such as avoiding prohibited transactions and working with disqualified persons—that you and your investors need to adhere to, so it’s a good idea to seek the guidance of professionals. Working with experts will make the process of raising IRA capital smoother and will help you to navigate securities rules and regulations.

Self-directed IRA accounts represent a significant source of capital for fundraisers, and the opportunity may only grow. Roughly 10,000 Americans retire each day, and that number is forecast to rise in the next decade. Those retirees will likely roll-over their company-sponsored pension plans or 401(k)s into IRAs, spurring the rise of self-directed IRAs. Who knows? It’s possible that your next round of funding may come from self-directed IRAs.

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.  PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”).  Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.