24 Apr Using Your Retirement Account to Invest in Large Privately-Held Businesses
Recently the Wall Street Journal posted a great article about how Mitt Romney and other Bain Capital executives used their retirement accounts to invest in private equity deals. In some cases, their IRAs saw a 20,000% return on investment. Those who have an understanding of how such transactions need to be structured can safely grow a retirement nest egg tax-free. While you are limited to the amount you can contribute to your IRA each year, you are not limited to the returns which you can get from a self-directed retirement account.
Such accounts can be structured in a number of ways including 401ks, IRAs and even Roth IRAs. They allow the individual to decide which investments are prudent, giving the custodian total control of his or her retirement funds. While a great deal of small-time investors use such funds to invest in real estate and other small businesses, there are a great deal of people who use their retirement resources to invest in potentially more lucrative investments, including private equity.
Lately private equity has certainly had its fair share of scrutiny, but the fact remains that many firms started by private equity and venture capital have proven highly liquid when it comes time for the founders and owners to exit the company. For those who’re experienced in private equity and understand and can see a great opportunity, using an IRA or 401k to invest in preferred, participating stock in a newly established high-growth private equity firm can be a huge boon.
Think for a moment. Let’s say you invest $10,000 from your self directed retirement account. You then put said funds into preferred participating shares of a high growth technology company you feel is a good bet. They have a great idea or product and more importantly, the right team to execute. Let’s say they go public or are purchased by a public company for an extremely high multiple five years later. Ever single dime in the account goes back to you tax-free (if you own a Roth IRA) or tax deferred (if you have a traditional IRA).
There are a number of ways this can be structured, but utilizing it most effectively can be a great boon for your retirement account and will allow you to avoid taxes as much as possible.