Individual retirement accounts (IRAs) provide a tax-advantaged way for individuals to save for retirement. However, there are specific rules around what types of investments can be held in an IRA. One area that generates questions is whether IRAs can invest in private companies.
Prohibited IRA investments
The IRS prohibits IRAs from investing in certain assets, such as collectibles, life insurance, and S-corporations. There are also rules against self-dealing that prevent IRA owners from personally benefiting from investments.
Permitted alternative investments
While IRAs cannot invest directly in private companies, they can invest in certain alternative assets like real estate, private equity, venture capital, commodities, and precious metals. This requires setting up a self-directed IRA with an administrator that allows such investments.
IRAs provide tax benefits but have restrictions on investing in private companies directly. With a self-directed IRA, alternative assets like private equity can be used for diversification while still maintaining retirement tax advantages.