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PENSCO Blog

PENSCO Blog

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

Why Entrepreneurs Should Consider Raising Retirement Funds

Businessman with briefcase

  |  By Christopher Orr, SDIP

If you do a Google search for fundraising ideas for entrepreneurs you'll find articles with titles like "Top Fundraising Ideas to Open a Business," or "How Startups Should be Fundraising." The articles suggest that entrepreneurs looking to raise money consider angel investors, cash advances, business loans, friends, family members and charge cards. As I was reading these articles and blog posts, I never saw a mention of retirement funds. Yes, that's right, retirement funds.

If these stories are any indication, retirement dollars are not top of mind for fundraisers. But they do represent a source of cash that shouldn't be overlooked. Here's why: Americans hold approximately $7.3 trillion in IRAs, according to the Investment Company Institute, and it is estimated that 2% -- or $146 billion -- of those funds are held in self-directed IRAs.

In a self-directed IRA, account holders -- not a plan administrator -- make active investment decisions. While self-directed IRA holders can invest in traditional exchange-traded assets like bonds and mutual funds, they can also invest in assets that traditional financial institutions don't offer, like limited partnerships, equity crowdfunding opportunities, real estate and private common stock.

Self-directed IRAs are poised for strong growth as baby boomers, who are estimated by the Pew Research Center to retire at a rate of 10,000 per day for the next 15 years, roll over their company-sponsored pension plans and 401(k)s into traditional or Roth IRAs that they control.

Using retirement dollars to invest in these types of private equity opportunities mean investors get the added benefit of investing with tax-advantaged dollars. With a traditional IRA, investors can defer capital gains taxes until it's time to take distributions. In a Roth IRA, account holders can avoid taxes on distributions and capital gains.

Retirement funds can also be a good source of capital for fundraisers because they tend to have inherently longer time horizons, which match the longer holding periods required of many private equity investments. And investors can face penalties if they take withdrawals from their IRA prior to turning 59½, meaning many choose to reinvest their earnings. This could provide you with a source of ongoing capital.

While retirement dollars might not be on your radar screen if you are looking to raise capital, they should be. If you want to learn more, you can download our guide: 

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.