Can You Invest in a Private Placement From an IRA?

Congress designed individual retirement accounts, commonly known as IRAs, to encourage long-term investing that benefits the account's owner and beneficiaries. A traditional IRA gives you a tax deduction for the money you contribute, but you must pay taxes on withdrawals. A Roth IRA offers no deductions, but withdrawals are tax-free if you follow the rules. A self-directed IRA gives you the maximum flexibility to choose your investments.

Self-Directed IRA

A custodian or trustee must administer an IRA. However, the custodian of a self-directed IRA has no say over your investment choices. It is up to the owner of a self-directed IRA to ensure that the IRA doesn’t contain prohibited investments. The Internal Revenue Service explicitly bans two types of investments from IRAs: life insurance policies and collectibles, although certain precious metals are acceptable. You can invest self-directed IRA money in private placements, and doing so can help diversify your investment portfolio. You cannot sell to your IRA private securities that you’ve purchased outside the IRA; they must come directly from the issuer.

Private Placements

A corporation can issue stocks and bonds to the public if they first register the securities with the US Securities and Exchange Commission. Once issued, these securities trade in the secondary markets on exchanges and over the counter. A private placement is composed of securities not registered with the SEC. Instead, the issuer takes advantage of Regulation D, which provides a few methods to sell unregistered securities privately to investors. The rules require that some or all of the private investors be "accredited."

Accredited Investors

The owner of an IRA need not necessarily be an accredited investor to buy a private placement, but the issuer might insist upon it, because some private placements, such as those under Rule 504 of Regulation D, are open only to accredited investors. Under Rule 501 of Regulation D, an individual accredited investor must have either $1 million in net worth -- not counting a primary residence -- or at least $200,000 of income in each of the previous two years. Up to 35 non-accredited investors can purchase an issuer’s private placement under Rule 505. Rule 506 private placements require any non-accredited investors to be “sophisticated,” which means they understand investment risks or have hired someone who does.

Considerations

If your IRA purchases private securities, you’ll have to wait to sell them. Under Rule 144, the holding period is six months to one year, after which you can sell the securities publicly. However, the wait ends if the issuer subsequently registers the securities with the SEC. During the waiting period, the securities are “restricted,” meaning you can’t sell them to anyone else. This might not concern you, because IRA investments are meant for the long run. If you withdraw a restricted security from a traditional IRA, you’ll owe taxes on the security’s fair market value as of the day of withdrawal. Normally, this value is a security’s public trading price, but since private placements don’t trade publicly, you must rely on other criteria, such as the latest price paid for similar securities from the issuer.

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About the Author

Based in Chicago, Eric Bank has been writing business-related articles since 1985, and science articles since 2010. His articles have appeared in "PC Magazine" and on numerous websites. He holds a B.S. in biology and an M.B.A. from New York University. He also holds an M.S. in finance from DePaul University.

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