Adam Bergman

How to Shelter Gains from Stock Warrants

warrants to bridge the gap to close capital raise investments. In most cases, stock warrants are granted for either zero value or below market value as part of the investment into the business. Unlike stock options which can be bought on the open market, stock warrants are not traded there and are sold directly by the issuing company. This article will cover the tax benefits of using a Self-Directed Roth IRA to buy private business warrants and shelter all gains.

What are Financial Instruments

Financial instruments are contracts or agreements that have monetary value and can be traded on financial markets. They serve various purposes such as raising capital, managing risk or speculating on price movements. They can range from simple agreements like stocks and bonds to more complex derivatives like options and warrants.

Each financial instrument has its own characteristics that make it suitable for different investment strategies and financial goals. Understanding these characteristics is key to making informed investment decisions and managing financial risk.

What are Stock Warrants?

In general, stock warrants are an agreement between a company and the investor or warrant holder. The warrants would entitle the warrant holders to buy shares or interests in the company at a specified price within a set period of time. In most cases warrants do not permit the warrant holder to receive company dividends, profit allocations or voting rights. Warrants are very valuable only for their potential to generate value from the sale of the business assets or interests.

There are two types of stock warrants: call warrants and put warrants. A call warrant gives the holder the right to buy shares at a specified price in the future. A put warrant gives the holder the right to sell a specific stock or asset to the issuer at a set price before a certain date.

In an era of higher interest rates, many start-ups and growth companies looking to raise capital have turned to stock warrants as a sweetener to incentivize investors to invest. Some companies will also use warrants when structuring strategic partnerships or investments to incentivize the other party. Stock warrants are contracts between two parties, typically the issuing company and the investor.

Warrant Characteristics

A stock warrant is a financial instrument that gives the holder the right but not the obligation to buy or sell a company’s stock at a specified price called the strike price on or before a specific date called the expiration date. Companies issue stock warrants to raise capital or as part of an employee compensation package. These warrants can be traded on the secondary market and their value is influenced by the underlying company’s stock price and time to expiration. The flexibility and potential for big gains make stock warrants an attractive option for investors looking to ride a company’s growth.

Options vs Warrants

The differences between options and warrants often cause confusion especially when it comes to company options. Warrants are similar to options in that they serve the same purpose of capturing growth in a business. The main difference is that options are generally offered to company insiders or employees and warrants are granted to third party investors or board members. Company options are typically issued under a formal option plan. Stock options are used in an employee compensation context and stock warrants are used in transactions with third parties.

There are two types of warrants: call warrants which allow the holder to buy shares at a specific future price and put warrants which allow the holder to sell shares at a predetermined price.

Tax Treatment of Stock Warrants

Exercising a warrant is a taxable event at the time the warrant is exercised. The taxable portion of the warrant is the difference between the exercise price and the current price of the underlying company stock. For example, if a stock is trading at $10 per share and you have a warrant that allows you to buy the shares at $5 per share the $5 difference would be taxable. However the tax would be ordinary income tax. In the future when the stock you now own is sold the sale would be governed by the capital gains regime and the costs involved in exercising stock warrants can impact investment decisions.

Stock options can be eligible for preferential tax treatment unlike stock warrants. Most warrants can be exercised in whole or in part by paying the cash exercise price. Some warrants also allow for a “cashless exercise.” A cashless exercise allows the warrant holder to exercise the warrants upon a capital event without paying for the warrants. An issue with a cashless exercise upon a capital event is that the tax treatment of the warrants would likely be subject to ordinary income tax or short-term capital gains tax.

Types of Instruments

Investors have access to various instruments, each with its own characteristics, risks and rewards. Common ones are stocks, bonds, options, and warrants. Stocks represent ownership in a company and entitle the holder to a portion of the company’s profits. Bonds are debt instruments that pay interest over time. Options give the holder the right to buy or sell an asset at a predetermined price.

Stock warrants, on the other hand, provide the opportunity to participate in a company’s growth and potentially earn big gains. But they come with high risk as the value of the warrant can expire worthless if the underlying stock price does not move in the desired direction.

Issuance and Exercise

When a company issues stock warrants, it gives the holder the right to buy a certain amount of stock at a specified price. The holder can exercise the warrant at any time before the expiration date obligating the company to issue new shares. The exercise price is typically set at a premium to the current market price providing an incentive for the holder to invest.

The issuance and exercise of stock warrants can significantly impact the underlying company including the potential dilution of existing shareholders’ stakes. This allows companies to raise capital while offering investors a chance to benefit from future stock price increases.

Owning a Warrant in an IRA

When it comes to making investments with an IRA, the IRS doesn’t tell you what you can invest in, only what you cannot invest in. The types of investments that are not permitted to be made using retirement funds is outlined in the Internal Revenue Code. These rules are generally known as the prohibited transaction rules.

Other than life insurance, collectibles, and transactions that involve or directly or indirectly benefit the account owner or a disqualified person, one can use his or her retirement account to make the investment.

Investing in stock warrants through a Self-Directed IRA can provide significant tax advantages.Unfortunately you cannot invest in a non-publicly traded investment using an IRA at a traditional financial institution such as Schwab or Fidelity; you need to "self-direct" your IRA with a special custodian, such as IRA Financial, to make stock warrant investments.

The mechanics of payment involved in using retirement funds to purchase stock warrants typically include setting up a payment plan with the IRA custodian and ensuring all financial transactions comply with IRS regulations.

What is a Self-Directed Roth IRA?

A Self-Directed Roth IRA is a type of retirement account that allows your money to grow tax free. You contribute to it with after-tax dollars, meaning you’ve already paid taxes on the money you put in. In return, your investments grow without tax. Qualified withdrawals in retirement are also tax free.

Key Features of a Roth IRA:

• Tax-free growth: You don’t pay taxes on investment earnings.
• Tax-free withdrawals: If you're age 59 ½ or older and the account has been open for at least five years, you can withdraw both contributions and earnings without paying taxes.
• Contribution limits (for 2026): Up to $7,500 per year (or $8,600 if you're age 50 or older).
• No required minimum distributions (RMDs) during your lifetime.
• Flexible access: You can withdraw your contributions at any time without penalty.

A Roth IRA is especially beneficial if you expect to be in a higher tax bracket in retirement or want tax-free income later in life. Just like a traditional plan, you can make alternative assets, including stock warrants with a Self-Directed Roth IRA.

Tax Advantage of Owning Stock Warrants in a Roth IRA

The primary tax advantage of using a Roth IRA to acquire a stock warrant is that all gains from the exercise and sale of the warrant would be tax free. If you exercised a warrant in a private business that was in the money the exercise and later sale of the stock would trigger ordinary income tax and a capital gains tax in the sale of the stock. If the stock was held less than twelve months then the gain would be subject to short-term capital gains rates which equal ordinary income tax rates. Conversely, if the stock is held greater than twelve months then a reduced capital gains rate would apply.

If the warrants were acquired by a retirement account, a tax-exempt savings vehicle, there will be no tax until you withdraw from the plan. Stock warrants also allow companies to issue new stock which can be beneficial for raising capital.

The reason a Roth IRA works so well in the context of stock warrants is that at grant the warrant has very low value (oftentimes zero) so, almost anyone can acquire the warrant. From an IRS perspective, the two keys to keep in mind when acquiring a warrant is to make sure the IRA is paying fair market value for the warrants (even if it is zero) and that the IRA owner and their family members will own less than 50% of the company at grant.

How to Structure Stock Warrants

There are many ways to structure stock warrants, however one way that can help a non-retirement account benefit from capital gains treatment is to structure the warrants in a way that they mirror a class of units or LLC interests. Essentially, the concept is that instead of requiring the investor to have to exercise the warrant and likely have to deal with ordinary income and short-term capital gain treatment on a capital event, the idea is to create a class of units that essentially only get paid out on a capital event based on a distribution waterfall in the company operating agreement.

Because of this, the warrants are basically turned into class interests that mirror the economics of warrants for a capital event but only would participate in the economics of the business on a sale.

Issuing stock warrants can also address various business issues by impacting a company’s financial standing, generating revenue from both the initial sale and potential exercise of the warrants. Stock warrants typically have longer expiration dates compared to stock options, often ranging from five to 15 years. Stock warrants can be attached to bonds to attract investors.

On the other hand the use of a Roth IRA to acquire the warrants will ensure tax-free treatment on the sale of the underlying stock or company interests. Additionally, the use of an IRA to purchase stock warrants works best when the investor is not an employee of the business. This is because the use of a Self-Directed IRA by an employee in connection with a grant of warrants could look more akin to employee incentive options which could be problematic from an IRS perspective.

Time Value Considerations

The value of a stock warrant is greatly affected by time to expiration and underlying stock price. The longer the time to expiration, the higher the potential value of the warrant as it gives more time for the stock price to move in your favor.

Further, the value of the warrant is affected by the volatility of the underlying stock price, interest rates and other market factors. Investors should consider these time value factors when buying or selling stock warrants as they can have a big impact on returns.

Conclusion

Stock warrants are a great way for private businesses to incentivize investors and sweeten the investment transaction. Warrants allow investors to share in the upside of the business and benefit on the sale of the business. Because most warrants are granted for free or at a low value, the use of a Self-Directed Roth IRA is an option for many investors looking to shelter the gains from the future sale of the business. Investors interested in stock warrants should understand their tax benefits and potential returns.

Maximize your tax-free gains with a Self-Directed Roth IRA

Explore how a Self-Directed Roth IRA can help you shelter gains from stock warrants, legally defer taxes on growth, and give you the flexibility to invest in a wide range of alternative assets for long-term retirement growth.
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by Adam Bergman

How to Invest in a Credit Fund with an IRA Using a Foreign Blocker

With interest rates on the rise and traditional income sources under pressure, many savvy investors are turning to private credit as a compelling alternative. These funds can offer attractive, stable yields—often backed by real assets or business cash flows. For investors with retirement capital, the question naturally arises: Can I invest my Self-Directed IRA in a credit fund—and keep it tax free?

The answer is yes—but only if it's structured the right way. That’s where the foreign blocker corporation comes in. In this article, we’ll explain how your IRA can gain exposure to high-yield credit investments without getting hit by unexpected taxes under the IRS’s Unrelated Business Taxable Income (UBTI) rules.

What Are Credit Funds?

A credit fund is an investment vehicle that primarily focuses on lending money or investing in debt instruments, rather than buying equity in companies. The goal of a credit fund is to generate returns through interest income, fees, and the repayment of principal, rather than through capital appreciation. These funds may invest in a wide range of credit assets, such as corporate bonds, private loans, and real estate debts. Credit funds can be structured as mutual funds, hedge funds, private credit funds, or even interval funds, depending on their strategy and investor base.

Credit funds appeal to investors seeking consistent income and portfolio diversification, especially in low-interest-rate or volatile equity market environments. They often carry less price volatility than stocks but come with their own set of risks, such as credit risk (borrower defaults), liquidity risk (difficulty selling certain debt instruments), and interest rate risk (decline in bond prices when rates rise). In recent years, investing in private credit funds—those that lend directly to businesses outside of public markets— using a Self-Directed IRA have gained popularity among institutional and high-net-worth investors for their potential to deliver higher yields with more control over loan terms and borrower selection.

The Problem: UBTI and Your IRA

Self-Directed IRAs open the door to a world of alternative investments: real estate, private equity, venture capital, and credit funds, among others. But many of these asset classes generate UBTI, which is taxable even inside an IRA.

Here’s the catch: IRAs are tax-exempt only as long as they don’t engage in certain kinds of business activity or use leverage in ways the IRS deems problematic.

Credit funds often cross these lines by:

• Originating loans (active business)
• Using leverage (triggering Unrelated Debt-Financed Income, or UDFI)
• Servicing loans (active business operations)

Once UBTI is triggered, the IRA itself becomes a taxpayer and must file Form 990-T. The tax rate can hit 37%, and that’s before any state taxes or penalties for noncompliance.

The Solution: A Foreign Blocker Corporation

The good news? There’s a well-established workaround used by institutional investors—and increasingly, by high-net-worth individuals and their advisors: invest through a foreign blocker.

A Cayman Islands corporation, in particular, can act as an intermediary between your IRA and the credit fund.

Why the Cayman Islands?

There are several reasons Cayman is the preferred jurisdiction:

• No U.S. tax filing (when structured properly)
• Streamlined entity formation and investor protections
• No Cayman income tax, so income flows through cleanly
• Well-regarded globally and widely accepted by U.S. credit funds
• Eligible for the Portfolio Interest Exemption, allowing tax-free interest flow

Think of the Cayman corporation as a protective wrapper. It separates your IRA from any "business activity" happening within the U.S., effectively shielding it from UBTI.

What Does the Structure Look Like?

Here’s how it works step by step:

1. Your IRA invests in a Cayman blocker corporation.
2. The Cayman corporation invests in a U.S. credit fund that:

   • Is structured to be passive (not originating or servicing loans)
   • Holds debt or other income-producing instruments
   • Does not engage in a U.S. trade or business

As long as the fund’s income isn’t considered effectively connected income (ECI) under U.S. tax rules, the Cayman entity avoids both U.S. income tax and filing obligations like Form 1120-F. And because the IRA holds shares in a foreign corporation, it receives income as dividends, not UBTI.

What About U.S. Withholding Tax?

Normally, interest payments to foreign entities from U.S. borrowers are subject to a 30% withholding tax.

But under the Portfolio Interest Exemption, this tax can be eliminated if:

• The loan is a registered debt instrument
• The interest isn’t tied to profits or ownership
• The recipient owns less than 10% of the borrower
• The entity provides a valid Form W-8BEN-E

When these conditions are met, interest payments from the U.S. fund to the Cayman blocker are completely tax free. And since the Self-Directed IRA sits behind the blocker, it receives its share of the returns without UBTI and without U.S. tax withholding.

Why Use an IRA Instead of After-Tax Dollars?

Even without UBTI, interest income from credit funds is typically taxed as ordinary income—meaning up to 37% federally, plus state taxes, when held in a taxable account.

But inside a tax-advantaged IRA, you can escape annual taxes, or eliminate the altogether. When using a pretax (traditional) IRA, there is an upfront tax break and taxes are deferred until you withdraw from the plan. When using a Self-Directed Roth IRA, there is no immediate tax break, but qualified distributions from the plan are tax free!

That’s a huge arbitrage opportunity. Your credit fund income can grow faster, compound over time, and be withdrawn either tax-deferred or tax free, depending on your account type.

An Example:

Let’s say your IRA invests $200,000 through a Cayman blocker into a passive U.S. credit fund earning 10% annually. That’s $20,000 per year in income.

• In a taxable account: You might lose $7,000+ to taxes.
• In an IRA (with a blocker): You keep all $20,000 compounding inside the account.

  • Over 10 years, the difference in after-tax growth will be substantial.

To use this strategy effectively, make sure:

✔️ Your IRA owns a foreign blocker (like a Cayman entity)
✔️ The blocker invests in a U.S. fund that is passive (not a U.S. trade or business)
✔️ The interest earned qualifies for the Portfolio Interest Exemption
✔️ You file the appropriate IRS forms

If those boxes are checked, your IRA can legally enjoy high-yield credit income without triggering UBTI, without paying U.S. withholding tax, and without sacrificing the tax benefits of your IRA.

Conclusion

Private credit is a powerful asset class—and when structured properly, it can be even more powerful inside your Self-Directed IRA. By using a foreign blocker, you can protect your tax-advantaged account from UBTI, avoid U.S. withholding, and preserve the full benefit of compounding returns. This strategy isn’t just for institutions. With the right planning and legal/tax guidance, individual investors can unlock these benefits too.

Ready to Get Started?

Open your IRA today or book a free consultation to start investing in credit funds the right way—with full IRS compliance and expert support from IRA Financial.

Frequently Asked Questions

by Adam Bergman

7 Reasons Why Private Equity is a Natural Fit for Your Retirement

When planning for retirement, most people think of traditional vehicles like stocks, bonds, and mutual funds. However, as the investment landscape evolves, one option is standing out more clearly than ever: private equity (PE). Long the domain of institutional investors, private equity is now increasingly accessible to individual investors—and it's proving to be a powerful tool for building lasting retirement wealth.

So, why is private equity a natural fit for your retirement? Let’s explore its many advantages and how it can be strategically used to create a resilient, high-growth retirement portfolio.

Understanding Private Equity Investments

Private equity refers to investments made directly into private companies, often through funds managed by PE firms. These firms raise capital from investors and use it to acquire or invest in businesses that are not publicly traded.

Types of Private Equity:

• Buyouts – Acquiring established companies and improving operations for value growth.
• Venture Capital (VC) – Investing in early-stage startups with high growth potential.
• Growth Capital – Providing funds to mature companies looking to expand.

Unlike public stocks, which can be bought and sold on exchanges, PE investments are held for years, aligning well with the long-term nature of retirement planning.

Key Differences Between Private Equity and Public Markets

Understanding what sets PE apart from public investments is key to appreciating its role in retirement:

This unique structure often translates to greater value creation, especially for patient investors.

Long-Term Nature of PE Matches Retirement Goals

Retirement planning is inherently a long-term endeavor—typically spanning 20 to 40 (or more) years. PE investments, which often have holding periods of 7-10 years, naturally align with this timeline.

Locked-In Capital Works in Your Favor

One of the criticisms of private equity is its illiquidity. However, this very feature works in favor of retirement savers. Locked capital avoids emotional selling and market timing errors while allowing returns to compound uninterrupted.

Potential for Higher Returns Compared to Traditional Assets

PE investments has consistently outperformed public equity markets over long periods. According to Cambridge Associates, top-tier private equity funds have historically generated annualized returns of 12% to 15%, compared to 7% to 9% for public equities.

Historical Return Data

A study by the American Investment Council found that private equity-backed funds outperformed the S&P 500 by over 4% annually on average over a 20-year span. That kind of compounding can dramatically enhance retirement outcomes.

Portfolio Diversification and Reduced Correlation

Another reason PE is an excellent fit for retirement is its ability to diversify your investment mix.

Risk Mitigation through Alternative Exposure

Private equity has a low correlation with public markets, which means it doesn’t move in lockstep with stocks or bonds. In times of market stress, PE portfolios have shown greater resilience, cushioning downturn impacts.

Access to Unique, High-Growth Opportunities

PE investors often get access to businesses that are not available on the stock exchange—including rapidly scaling startups and niche market disruptors.

Private Equity Opens the Door to Private Markets

Through private equity, you can invest in:

• Tech startups
• Healthcare innovators
• Family-owned businesses
• Sustainability-driven enterprises

These sectors can fuel long-term growth, especially in early and mid-stage phases.

Inflation Hedge and Downturn Resilience

PE firms typically work closely with their portfolio companies to enhance operational efficiency, pricing power, and market positioning—all of which help during inflationary periods.

Operational Improvements and Value Creation Strategies

These firms drive value by:

• Restructuring operations
• Improving profit margins
• Refinancing debt
• Accelerating digital transformation

This active management makes private equity more adaptable and resilient during downturns than passive investments.

The Rise of Retail Access to Private Equity

In the past, private equity was restricted to institutional and ultra-high-net-worth investors. Today, it’s increasingly available to individual retirement savers through platforms like:

• Fundrise
• Moonfare
• K7 Capital Partners (check out our partners page)

Democratization Through Platforms and Regulations

Many platforms now offer access with minimums as low as $5,000, and new SEC rules are enabling broader access via retirement accounts like IRAs and even 401(k) plans.

How to Get Started With Private Equity for Retirement

Before jumping in, it’s essential to follow a smart and measured approach.

Step-by-Step Guide:

1. Assess your goals and time horizon.
2. Research fund types (direct, fund of funds, interval funds).
3. Understand fee structures—typically 2% management and 20% performance fee.
4. Start small—allocate 5-10% of your retirement portfolio.
5. Use tax-advantaged accounts like a Self-Directed IRA (SDIRA).

Considerations for Accredited and Non-Accredited Investors

• Accredited investors have access to more direct and niche funds.
• Non-accredited investors can still gain exposure through registered funds and regulated vehicles.

Using a Self-Directed IRA to Invest in Private Equity

One of the most effective ways to access private equity for retirement is through a Self-Directed IRA (SDIRA). Unlike standard IRAs that limit you to publicly traded stocks, bonds, and mutual funds, a Self-Directed IRA gives you the flexibility to invest in a broader range of alternative assets—including private equity. This flexibility makes SDIRAs an ideal vehicle for investors seeking access to higher-growth opportunities like private equity.

Why Pair a Self-Directed IRA with Private Equity?

Combining the long-term focus of private equity with the tax advantages of a Self-Directed IRA creates a powerful retirement planning strategy. Here’s how:

• Tax-Deferred or Tax-Free Growth: Gains from private equity investments grow tax-deferred in a traditional plan or potentially tax free in a Roth.
• Compound Over Time: The long holding periods common in private equity align perfectly with the retirement horizon, allowing returns to compound uninterrupted.
• Diversification Beyond Wall Street: Self-Directed IRAs let you invest in companies you believe in outside the volatility of public markets.

For investors looking to unlock the potential of the private markets, the Self-Directed IRA provides a unique gateway. You retain control over your retirement portfolio while enjoying access to high-growth opportunities once reserved for institutions. If you're comfortable with a longer investment horizon and are seeking portfolio diversification, using a Self-Directed IRA to invest in private equity could be a strategic move toward a more prosperous retirement.

Conclusion

Private equity is no longer just for the wealthy or institutions. As access expands and awareness grows, it’s becoming an essential component of a modern retirement strategy. Its long-term growth potential, diversification benefits, and resilience during downturns make it a natural fit for retirement portfolios looking for more than just market-average results. As with all investments, careful research and professional advice are key. But for those willing to think beyond traditional assets, private equity offers an exciting path to a secure and prosperous retirement.

Do you have questions about private equity investing using retirement funds? Contact us now or schedule a free consultation to speak with a member of our team.

Ready to Add Private Equity to Your Retirement Portfolio?

Private equity offers growth, diversification, and unique deal access—not typically available in traditional IRAs. Our team can help you structure your self-directed IRA to navigate the ins and outs of private equity deals, stay compliant, and position your retirement investments for long-term success.

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Frequently Asked Questions

by Adam Bergman