InSight

Private Placements in your IRA & 401(k)

Financial Planning Dentist

A Self-Directed IRA (SDIRA) is very similar to a traditional IRA but gives you more ways to diversify your investments and retirement savings and can include using Private Placements. The SDIRA gives you greater control and flexibility by investing in things you know and believe in by widening your investment selections into your areas of interest or expertise. 

Unlike your typical bank or brokerage account, you’re not limited to where you invest. The SDIRA gives you the ability to find alternative investments like real estate, private companies, start-ups, LLCs, LPs, etc. 

At InSight, we partner with the Entrust Group to help administer the accounts, and empower our clients to invest in the things they’re passionate about to help them achieve their goals. Entrust shares our core beliefs that client’s should be able to find new ways to increase their potential for growth, protect their net worth against economic fluctuations through diversification, take more control, and grow their savings and retirement in tax advantaged accounts. 

Being in Colorado, we’re surrounded by entrepreneurial leaders from technology to pharmaceuticals and we want our clients to get invested in those companies if they desire. Through Private Placements, our clients can invest in privately-held companies. Since a lot of those companies have a hard time getting the funding required to reach their goals, you could be the one that gets them the additional funding they need which spurs the company to new heights. Whether it’s LLCs, C-Corps, Private stock, Partnerships, Private Placements, business, or notes you can invest in almost anything.

Private Placements allows companies to raise money by selling stocks, bonds, or other instruments. Some but not all offerings are exempt from federal securities registration requirements, meaning they may or may not have to comply with registration requirements of a public securities offering (meaning more risk if they don’t and less transparency). 

It is extremely important that you make sure of a couple of key items before making this type of investment. 

  • Before any investment do your due diligence. This can mean your own research, hiring someone to do a valuation, or a combination of both. 
  • Understand your own liquidity needs and the liquidity of any investment prior to investing. Some investments in private placements require holding periods of 5-10 years so if you need or may need that money before or during that period then investing that money in that strategy isn’t for you. If you’re retired, you need to take RMDs. If you don’t have available funds the penalties for not taking it are extremely high
  • You may be responsible for taxes in your IRA depending on if earnings are paid out or not
  • LLCs can be considered securities and may be required to meet the standards of security offerings

In order to make an investment like a Private Placement, you must be an accredited investor. Meaning, your net worth (excluding your primary residence) must exceed 1 million or you have to have income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. 

Risks of Private Placements even after doing your due diligence and research include:

  • They’re not reviewed by regulators at the state or federal level and therefore have become a haven for fraud. They’re now the most frequent source of enforcement cases conducted by state securities regulators in North America. 
  • Background checks of sellers, officers, or managers may not have been conducted 
  • Generally speaking, they’re illiquid, and investors may have to hold their investments indefinitely
  • Investors are usually provided minimal disclosure information than a public offering, meaning investors know much less about the investment itself and the people running the show
  • The value of the asset may be provided by a qualified third party, but they must provide sufficient supporting documentation with the Fair Market Valuation Form. FMV Form

How to protect your investment:

  • Surround yourself with people to help you, processes to research and understand the investment, and policies to hold you accountable
  • Don’t complete an agreement or questionnaire unless you fully understand it
  • Hire a 3rd party professional to review the document and investment
  • If you’re asked to falsify information, walk away
  • If your gut is telling you no because of a lack of clarity you should probably trust it
  • Invest in what you know
  • Request as much information as you can and ask every question you want

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