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AdBits Episode 21 – Using an IRA to Invest in Investment Funds

AdBits Podcast
3 Minute Read

Last Updated on December 22, 2020

IRA Financial’s Adam Bergman Esq. discusses how and why to use IRA money to invest in investment funds, such as private equity, hedge funds, venture capital and real estate funds.




An investment fund is an investment into a passthrough fund, such as an LLC or partnership, that generally has an investment strategy. There are different types of investment funds, like private equity, hedge funds, venture capital, real estate funds, biotech funds. They all have specific investment strategies. The most popular fund is private equity. You give your money with a general partner who will hopefully invest it (along with other investors) to successful businesses. These types of business being invested in are worth at least $10m, and can go into the billions of dollars.

The general partner takes a small (1-2%) fee for the work he or she has done. It’s a sophisticated strategy where you trust someone much smarter than you or I to find a good value, which in turn, will produce a nice return on your investment.

On the other hand, a venture capital fund invests in “younger” businesses, like startups. The venture capitalist will identify a new technology or product that a business may be developing. He will then raise funds to invest in the business in the hopes of a successful endeavor.

Obviously, real estate funds involve properties and can be any type of investment – fix and flips, commercial or residential

No matter the type of investment fund you choose, the general partner or manager of the fund gets a nice chunk of the profits. The investors, also make out well when the investment is a success.

Using Retirement Funds for an Investment Fund

Before investing, you must do your due diligence on the investment, including reading the PPM or private placement memorandum. When you use 401(k) or IRA funds, you will receive a subscription document. These will include all the important documents and agreements regarding your investment. You will also need to provide info about yourself, including your plan custodian, the name of the LLC (if you are using one), and details about yourself and the plan custodian.

Of course, your custodian will need to allow for investment fund investments. Generally, you will need to self-direct your plan if you wish to invest in something other than traditional investments, like stocks and mutual funds. When using a custodian, such as IRA Financial, you can have checkbook control of your IRA or Solo 401(k) funds to invest in whatever you wish, including investment funds.

Once you have found a fund you wish to invest in, you simply use your checkbook control to invest whatever amount you wish. Obviously, that is up to your in conjunction with your financial advisor. IRA Financial does not offer investment advice and simple administers your retirement plan.

There may be a lockup period for your investment, meaning you can’t pull money out within a specific time-frame. However, since you are using retirement funds (most people will use a Self-Directed IRA), all income generated by the investment fund flow back into the plan. The money continues to grow on a tax-deferred basis. If you use a Roth account, your distributions will be tax free after age 59 1/2.

Know the Rules

Two things you should be aware of are the prohibited transaction rules and the UBTI tax. It’s against the rules to invest retirement funds with a disqualified person. However, with an investment fund, it’s not out of the question to partner up with your IRA or 401(k). A lot depends on how the fund is structured. You should work closely with an attorney to make sure you can use your IRA to invest, if there is a disqualified person involved, such as a spouse, parent or child.

UBTI is a four letter word that could make an IRA investment tax-inefficient. A lot depends on the type of businesses the fund is investing in. If they are C Corporations, you are good. If the portfolio companies are LLCs, you open yourself up to the UBTI tax.

Mr. Bergman discusses what you should be on the lookout before investing your retirement funds into an investment fund. The last thing you want to do with that money is pay taxes, unless the return is so good that it doesn’t matter. After all, IRAs and 401(k) plans are tax-advantaged ways to save for the future. If an investment is taxable, you must weigh the benefits against that.

Stay In Touch

We always appreciate our listeners and we hope you will continue to listen and spread the word. You can find AdBits on SoundCloud, YouTube or your favorite streaming platform. Thanks for listening and if you have any topics you want to see covered, give us a call @ 800.472.0646 today!

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