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SPAC – Use a Roth IRA for Founder Stock


There has been an increasing trend this year for SPACs – special-purpose acquisition companies. These companies essentially invest in new start-up companies, who may make a big splash once they go public. A tax-advantaged way of investing in a SPAC is by using a Roth IRA for the “founder stock” you receive. We’ll explain exactly what a SPAC is and how you can take advantage of the Roth plan to invest.

What is a SPAC?

A SPAC is defined as blank-check companies formed by sponsors who believe that their experience and reputations will allow them to identify and complete a business combination transaction with a target company that will ultimately be a successful public company.

The idea is to pinpoint upstarts that will eventually go public via an initial public offering (IPO). Obviously, the goal is to find those companies that will be a home run once they go public. As an investor in the SPAC, you are given stock into the company. Once the company goes public, the funds generated by selling the stocks go into a trust. That money remains in the trust until the “close of the business combination” or if deal cannot be completed in a timely manner.

It’s important to understand the process of how the SPAC works. The SPAC is created and an IPO is started. Once the funds are raised by the sale of the stock, a target company is selected. Obviously, the more high-profile the investors are, the more money will be generated by the IPO. Generally, the SPAC has two years to complete an acquisition of the target company.

A recent NY Times article gives three reasons why SPACs have grown in popularity this year. First, valuations have gone through the roof for technology and similar startups. With so many people working from home, there’s a growing need to improve the new workplace. Next, SPACs are not an alternative to regular IPOs. Using a SPAC to perform a merger or acquisition gives the startup company liquidity and the ability to retain a stake in the company. Negotiations can be done secretly and directly. Lastly, the more money out there, the better the deal for the startup companies looking to merge/bought. It’s basically a domino effect as the money rolls in, more companies are sold, creating more interest and new money into SPACs.

Where Does the Roth IRA Come In?

If you are involved in a SPAC, you receive up to 20% in founder stock. The stock can be cashed in at a later date. The nice thing about the SPAC is that if a deal cannot be reached with a target company, the funds are returned to the stockholder. However, those funds could’ve been invested elsewhere, instead of doing nothing. If you choose to invest in a SPAC, it’s important you know the particulars, so you can make an informed investment decision.

Investing in the founder stock with a Roth IRA make a lot of financial sense. A Roth IRA is funded with after-tax money, but all qualified distributions are tax-free during retirement. Holding that founder stock in a Roth could lead to a nice (tax-free) payday in the future.

How it Works?

If you don’t have a Roth IRA, it’s time to get one, preferably a Self-Directed Roth IRA. This type of Roth will allow you to invest in just about anything you want, include a SPAC. A bank-owned IRA will probably not allow you to make this type of investment. Once you have the Roth, you need to fund the plan. As we mentioned, it’s funded with after-tax funds, meaning no tax deduction afforded to pretax IRAs. However, so long as the Roth is open for at least five years and you are at least age 59 1/2, all distributions are tax free.

You may contribute up to $6,500 to a Roth IRA for 2023, plus an additional catch-up of $1,000 if you are at least age 50. Alternatively, you can convert traditional retirement funds to a Roth. You just need to pay the taxes on any amount converted. You can then purchase the stock with your Self-Directed Roth IRA by simply writing a check or wiring funds from the plan account.

The founder stock in the SPAC is held in the Roth IRA for as long as you want. If you invest $10,000 in the stock which increases to $30,000, that entire amount is tax free when withdrawn.

SPAC and You

SPACs are not new, but they are receiving much more attention this year. 2020 has seen a record number of funds this year, which is expected to triple the previous one-year high set last year. If you are looking into investing in a SPAC, then you need to strongly consider using a Roth IRA to invest.

If you have any questions, please feel free to reach out to IRA Financial at 800.472.0646. We can explain how the Self-Directed Roth IRA works and how you can invest in a SPAC.


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