Private Equity Investments with a Self-Directed IRA: What You Need to Know

Private equity investing has traditionally been associated with institutions and ultra-high-net-worth investors. However, it has also played a significant role inside retirement accounts. One of the most well-known examples is former Massachusetts governor and presidential candidate Mitt Romney, who reportedly grew his IRA to more than $100 million by investing in private equity deals through Bain Capital.

So why would someone choose to invest in private equity using a Self-Directed IRA?

The answer comes down to taxes.

When private equity investments are held inside a Self-Directed IRA, gains can grow tax-deferred in a traditional IRA or potentially tax-free in a Roth IRA. This allows profits to compound without being reduced by annual capital gains or income taxes, which can dramatically impact long-term returns.

Below is what investors need to know about investing in private equity with a Self-Directed IRA and how to do it correctly.

What Is Private Equity?

Private equity is a broad term used to describe investment funds that pool capital from multiple investors, typically through a passthrough entity such as a partnership or LLC, to acquire ownership stakes in private companies. These investments may include:

• Mature businesses in need of restructuring or operational improvements
• Growth-stage companies seeking expansion capital
• Distressed companies requiring a turnaround

Private equity is often confused with venture capital. While similar, there is a key distinction. Private equity generally targets more established, revenue-generating businesses, whereas venture capital focuses on early-stage companies that may have little or no revenue.

Both private equity and venture capital funds raise money from accredited investors, family offices, pension funds, institutions, and increasingly, Self-Directed IRAs.

Private equity funds typically earn revenue through:

• A management fee, often around 2 percent annually
• A carried interest, usually 20 percent of profits above a minimum return threshold

Although fees are higher than traditional investments like mutual funds or ETFs, investors participate with the expectation that returns will justify the cost.

YouTube video: https://youtu.be/w_96WDCT2Pw

How a Self-Directed IRA Invests in Private Equity

A Self-Directed IRA allows you to use pre-tax, Roth, SEP, or SIMPLE IRA funds to invest in private equity and venture capital opportunities. There are two primary structures available.

1. Custodian-Controlled Self-Directed IRA

With a custodian-controlled SDIRA:

• A specialized IRA custodian holds your IRA assets
• At your direction, the custodian executes the investment into the private equity fund
• The investment is titled in the name of the IRA

This structure works well for passive private equity investments that involve relatively few transactions, such as an initial capital contribution followed by occasional capital calls.

2. Self-Directed IRA LLC (Checkbook Control)

The Checkbook Control structure uses a specially formed LLC that is:

• 100 percent owned by the IRA
• Managed by you (without compensation) or a third party
• Equipped with its own dedicated bank account

With this structure, you can fund private equity investments by writing a check or sending a wire directly from the IRA LLC bank account. This approach is ideal when timing matters, capital calls must be met quickly, or multiple private investments are involved.

For lower-frequency private equity investments, a custodian-controlled SDIRA is often sufficient. Investors seeking speed, flexibility, and reduced transaction friction frequently prefer the Checkbook Control model.

Understanding the Prohibited Transaction Rules

When investing in private equity with a Self-Directed IRA, compliance with IRS prohibited transaction rules under Internal Revenue Code Section 4975 is critical.

A “disqualified person” includes:

• The IRA owner
• A spouse
• Parents, grandparents, children, and grandchildren
• Entities controlled by the IRA owner or other disqualified persons

Your IRA cannot invest in a private equity fund if you or another disqualified person has:

• An ownership interest
• A management, employment, or compensated role
• Any arrangement that provides a direct or indirect personal benefit

In simple terms, your IRA may invest in almost any private equity fund as long as neither you nor your family members are personally involved in the fund.

In some cases, it may be possible to invest in a fund where you have a professional relationship, but these situations require careful analysis to ensure there is no direct or indirect personal benefit. Prohibited transaction determinations are highly fact-specific, and mistakes can result in severe taxes and penalties.

Understanding UBTI in Private Equity Investing

Most private equity investments held in a Self-Directed IRA do not generate Unrelated Business Taxable Income (UBTI). However, UBTI can apply under certain circumstances, including when:

• The private equity fund invests in an operating business held through an LLC or partnership
• The underlying company generates active business income
• The investment involves leverage or debt

For example, if a private equity fund acquires a manufacturing company structured as an LLC, the income allocated to the IRA may be subject to UBTI, which is taxed at trust tax rates of up to 37 percent.

If the underlying business is structured as a C corporation, which is the case for most public companies, UBTI does not apply.

Before investing, it is wise to discuss fund structure and potential UBTI exposure with the fund sponsor and a knowledgeable Self-Directed IRA advisor.

Putting It All Together

Private equity is one of the fastest-growing asset classes inside Self-Directed IRAs. These investments are generally passive, involve relatively few transactions, and pose minimal prohibited transaction risk when the IRA owner has no personal involvement in the fund.

That said, investors must still carefully evaluate:

• Fund structure and entity type
• Potential UBTI or UDFI exposure
• Disqualified person rules
• Proper titling and documentation

When structured correctly, private equity can be a powerful tool for long-term, tax-advantaged retirement growth.

Why IRA Financial?

IRA Financial is the nation’s leading authority on Self-Directed IRAs and Checkbook Control solutions, serving more than 27,000 clients and administering over $5 billion in alternative-asset retirement funds.

What sets IRA Financial apart is not just experience, but true thought leadership. Founder Adam Bergman has authored nine books on self-directed retirement investing, including multiple works focused specifically on Checkbook Control IRAs and advanced IRA tax rules. Quite literally, IRA Financial wrote the book on Self-Directed IRAs.

Beyond expertise, private equity investing inside an IRA requires ongoing compliance, proper tax reporting, and the ability to navigate complex IRS rules involving UBTI, UDFI, partnership taxation, and multi-state LLC requirements. This is where IRA Financial is unmatched.

IRA Financial is the only major provider for Self-Directed IRA private equity investors that offers:

• Annual compliance review and consulting
• Unlimited access to in-house tax professionals for transaction structuring, prohibited transaction analysis, and UBTI review
• Annual LLC tax reporting and ongoing maintenance
• Customized transaction review before you invest
• IRS-proven Checkbook Control structures with over 15 years of successful implementation

Whether you are investing in private equity, venture capital, hedge funds, or private companies, IRA Financial provides the compliance, tax expertise, and technical guidance needed to protect and optimize your retirement investments.

With unmatched experience, industry leadership, and a proven track record, IRA Financial remains the clear number one provider of Self-Directed IRAs and Checkbook IRA LLCs in the country.

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