Private equity & venture

What it is

Private equity and venture investments are ownership interests in companies that aren’t publicly traded — direct stakes, LP interests in buyout or growth funds, and venture funds backing early-stage startups. They offer access to private-market returns in exchange for illiquidity and higher risk.

Holding it in a self-directed IRA

The IRA subscribes as the investor and is named as the owner of the interest. Capital calls are met from IRA cash, distributions return to the IRA, and the custodian holds the interest and processes the paperwork you direct.

Requirements

The IRA is the named subscriber and the source of all invested capital.
Subscription documents are executed for the benefit of the IRA.
The account holds enough cash to meet future capital calls.
Accredited-investor or qualified-purchaser status is confirmed where the offering requires it.

Limitations and prohibitions

You cannot invest IRA funds into your own business, or one you or a disqualified person controls — that is a prohibited transaction under IRC § 4975.
Operating-business income received through a pass-through (LLC or LP) can trigger unrelated business income tax (UBIT) under IRC §§ 511–514, filed on Form 990-T.
Missing a capital call can cause the interest to default or be diluted.
Interests are illiquid, often locked up for many years, with valuation set by the manager.

Valuation and liquidity

Valuations come from the sponsor’s periodic marks rather than a public market, and interests are highly illiquid with long lock-up periods and limited transfer rights.

Tax considerations

Keep uncommitted cash in the IRA for future capital calls, and watch for UBIT when the investment passes through operating-business income.

A worked example

Your IRA commits $50,000 to a venture fund and meets each capital call from IRA cash as it’s drawn. If the fund invests through an operating LLC that passes through business income, that income can be UBIT, reported on Form 990-T. When the fund returns capital, it flows back to the IRA.

IRS forms & records

Form 990-T — UBIT on operating-business income received through a pass-through.
Form 5498 — fair-market value, using the manager’s periodic mark.
Form 1099-R — distributions from the IRA.

Common mistakes that can cost you

Investing IRA funds into a business you or a family member controls — a prohibited transaction.
Missing a capital call for lack of IRA cash, causing default or dilution.
Overlooking UBIT on operating pass-through income.
Having no plan for the interest’s illiquidity and valuation.

Before you invest

The investment isn’t in a disqualified-person entity.
Cash is reserved for future capital calls.
UBIT exposure has been assessed.
Accredited-investor status is confirmed where required.
There’s a valuation source for reporting.

Authorities

IRC § 4975 — prohibited transactions and disqualified persons.
IRC §§ 511–514 — unrelated business income tax.
Ellis v. Commissioner, T.C. Memo 2013-245, aff’d 787 F.3d 1213 (8th Cir. 2015) — self-dealing salary from an IRA-owned business.

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