Looking for Investors? Try this non-Traditional Funding Source

Published on January 30, 2018

If you own a startup company or you’re simply seeking investors to infuse capital into a new project, you could go to a lending institution and try your luck there. You could also turn to people you know who have self-directed retirement plans and are interested in funding your project through their tax-advantaged retirement plans.

Individuals who choose to establish a self-directed retirement plan can use those retirement funds to invest in many different types of alternative assets including private companies, hedge funds, secured and unsecured loans, and real estate properties or projects. Now that funding options are open to a wider pool of potential investors, there is increased potential for more individuals to diversify their retirement portfolios as angel investors. That means more opportunities for startups, entrepreneurs, real estate developers, theatre and film productions, and many others to find the capital they need to launch their companies or projects.

Funding from a self-directed retirement plan is typically facilitated as a private placement into an entity or through the execution of a promissory note. Under this structure, the self-directed account is listed on all documentation as the investor (or the lender in case of a note) and any returns, interest and/or principal paid back to the plan (from the borrower) remains tax-sheltered.

As with all self-directed transactions:

• The account holder is expected to thoroughly research the target investment and conduct full due diligence, since self-directed investors make all their own investment decisions (either independently or under the guidance of an advisor).
• The investor works out all terms of the investment with the other party. The investor relates those terms in the instructions to the self-directed retirement plan administrator (such as our sister company, Next Generation Services), who reviews each transaction to ensure there are no obvious prohibited transactions and executes the transaction according to those instructions.
• The assets are held by the custodian (like Next Generation Trust Company) who is a regulated entity.
• All income and expenses related to the investment flow directly in and out of the retirement plan.
• The retirement plan can NOT transact or do business with any “disqualified individual.” These include the IRA owner, his/her spouse, ascendants, descendants and their spouses; a person providing services to the plan or a fiduciary of the plan. This is designed to ensure that investments made by a self-directed IRA ultimately serve to benefit the IRA directly and do not present a conflict of interest.

As our clients will tell you, self-direction can be a great way to diversify a retirement portfolio through nontraditional investments you already know and understand—and that you may already be investing in outside of your existing retirement plan(s). Self-directed plans enjoy all the same tax advantages of regular IRAs (Traditional and Roth, SEP, or SIMPLE), solo(k) plans, HSAs or Coverdell Education Savings Accounts—depending on the type of account you choose to self-direct. Unlike the traditional versions of these plans, you are not limited to stocks, bonds and mutual funds that most financial institutions offer; in fact, with the exception of collectibles, antiques and life insurance products, the options are nearly limitless.

Whether you’d like to personally bolster your own retirement wealth or simply tap into the growing self-directed retirement market to fund your projects, you can contact the team at Next Generation Trust Company by emailing Info@NextGenerationTrust.com or calling (888) 857-8058. You can open an account with our Starter Kits or check out our educational library before getting in touch.