Self-directed IRA investors who are interested in alternative strategies should explore opportunities with entrepreneurs trying to raise funds, according to Chris Orr, director of institutional products and private equity focus for Pensco.
Investors in self-directed IRAs have more freedom to invest in alternative strategies, and people who are looking for longer-term investments, especially in areas where they have expertise or greater interest, could be ideal investors in things like startups trying to raise funds on an equity crowdfunding platform.
Using a self-directed IRA to invest in startups provides a way for clients to “invest in what they know and what they love,” Orr told ThinkAdvisor on Monday. Some investors may also appreciate a greater feeling of control over their retirement, he added. “They’re getting a nice diversification play. They’re also getting all the tax advantages of an IRA account while investing in things that could potentially have a higher return for them.”
For entrepreneurs, self-directed IRAs present a large pool of potential income. The Investment Company Institute found Americans hold over $7 trillion in IRAs as of 2014. A 2011 Investor Alert regarding self-directed IRAs from the Securities and Exchange Commission estimated about $94 billion of IRA assets were in self-directed accounts.
Offering their IRA as a source of fundraising for an entrepreneur is not without risk, though, and the strategy isn’t for everyone. “Like any investment, everyone has to do their due diligence. No investment is fail-proof,” Orr said. “For some of these private equity positions, even real estate for that matter, it’s a calculated chance you take — higher risk, higher reward. Just like anything else, this is probably going to be more on the exotic side for most people.”