How you can tap retirement accounts for angel investments

This post was co-written by David Verrill, ACA Chairman and Founding Manager and Partner of the Hub Angels, and Rob Spalding, Senior Advisor with Alternative Solutions Group, a self-directed retirement account consulting firm.

In the world of angel investing it is critical to know all the tools available for managing risk, creating value, and also addressing tax efficiency if possible. One of the most under-utilized tools for angel investing is a self-directed retirement account such as an IRA or 401(k). Many angels are just learning that private equity and private placements such as angel funds can be held in these accounts tax-deferred or tax-free. Hub members have been using this mechanism in the Hub funds for nearly 10 years, and we have five people in our current fund investing through self-directed IRAs.

It has been legal to use a retirement account to invest into private stock since the 1970’s when IRAs were born. Since it is fairly nuanced, large securities brokerage firms simply do not readily offer these types of accounts, preferring to stick with the easily-replicated and highly-profitable stocks, bonds, ETFs and the like.

But like any unconventional investment mechanism, you need to know the basics in order to succeed, so here they are:

To get started, you need to select a specialized custodian to hold your IRA that regularly handles private stock and private placements. For example, we have been using PENSCO Trust Company out of San Francisco (but with offices across the US, including Portsmouth, NH). And we are not alone, as it was discovered post-IPO that several of Yelp!’s investors used the same method. It will save you time and money to find advisors that have done these types of transactions before, so that they don’t learn the theory on your budget and with no experience to execute.

Investments in angel funds are the simplest approach to take, as the managers of those funds can manage the process and handle the valuation and reporting requirements with the custodian.

The IRS has rules on self-dealing that you need to watch out for. For example, if you are an investor in a company through a self-directed IRA, sit on the Board, or advise/consult for it with compensation, then you are self-dealing. You don’t want to disqualify your retirement account or worse, cause yourself to be penalized by the IRS.

If you follow the basic rules, you get the benefits of accessing this pool of capital and the tax benefits if the investment pops within the account…even a Roth IRA account where you can benefit from low initial valuations in a tax-free environment. And since IRAs alone are a roughly $5 trillion national pool of capital, that makes for a powerful mechanism to further angel investing. So, when you put together the knowledge, advisors, and strategy going in, retirement accounts can be a powerful tool for the angel community.


What are the tax after an exit?
Kelly Hwang  9 years ago 
How do you not violate UBTI rules if the business has leverage?
E N  7 years ago