As more investors look to diversify, many are beginning to use retirement funds to invest in alternative assets such as private equity and real estate. Kelly Rodriques brings executive experience from private equity, software and communications, with a particular focus on using technology to enable growth, to his role as CEO & President of PENSCO Trust Company. It’s in this capacity that he is particularly well suited to help companies connect with those looking to use their retirement accounts in a different way.
Why should I consider using retirement dollars to fund my offering?
Kelly Rodriques: Americans hold approximately $7.3 trillion in individual retirement accounts (IRAs). These retirement savings are poised for strong growth as baby boomers, who are forecast to retire at a rate of 10,000 per day for the next 15 years, roll over their company-sponsored pension plans and 401(k)s into traditional or Roth IRAs that they control.
Retirement investors can be loyal, long-term asset holders as they may incur penalties if they take withdrawals from their IRA prior to turning 59.5 years, meaning many choose to reinvest their earnings, which could provide you with an ongoing source of capital. In addition, many private equity investments require longer holding periods, making them a good match for retirement funds that also typically have a longer time horizon.
And finally, investors who have already invested capital with you using their taxable dollars can also do so with their retirement funds. This allows them to build wealth and generate income on a tax-deferred or tax-free basis.
I’ve heard that retirement accounts can invest in alternative assets, like private equity. How is this possible?
Since 1974 the Employee Retirement Income Security Act has allowed investors to hold non-exchange traded alternatives within a retirement account. A custodian who satisfies IRS requirements must custody these assets.
PENSCO is an alternative asset custodian and 60% of the new accounts we opened last year were in the form of a private fund, private placement or other type of private equity.
Understanding that personal retirement funds can be used to invest in private equity opportunities can give you a leg up in raising capital and building your business. PENSCO helps guide you through the complexities of tapping into qualified funds and we can also educate your investors about potential pitfalls, such as prohibited transactions.
How do I know if the investment I’m offering is eligible to accept IRA funds?
Certain investment types and transactions are not allowed to be held in an IRA because they are considered prohibited transactions and may have disqualified parties involved. For instance, one of the basic tenants of self-directed IRA investing is that you and your family can’t personally benefit from the assets your IRA invests in. So, if you want to invest in your son’s startup, you are generally not able to use retirement funds.
At PENSCO, we will perform a pre-review to determine if your investment is “administratively feasible” and can be held in a PENSCO retirement account. Our Asset Review Team understands all the rules and regulations, and works to review potential investments in an efficient time frame.
I’ve never used retirement dollars to fund an offering. Is this a complicated process?
While using qualified IRA funds to invest in alternative assets could seem complicated, PENSCO has worked hard to make the process as smooth and seamless as possible. We’ve reduced the amount of paperwork involved by creating online wizards, alerts, and other digital tools to keep your investors informed.
Your investors can now open an account in as little as five minutes using our Online Account Wizard which eliminates the need for physical paperwork to be sent via mail. Once your investment is deemed to be administratively feasible, and funds and documents are in place from your investors, investment transactions can typically be completed within two business days.
Are there any laws or regulations my investors and I should keep in mind?
Your investors should certainly understand the rules of the road before opening a self-directed IRA and investing retirement dollars in alternative assets. The Internal Revenue Service considers the retirement account, not the IRA account owner, to be the investor. Because of this the account owner cannot receive any direct or indirect benefit from the investment while it is held in the account. This would be considered self-dealing and is prohibited. This means that generally an account holder cannot use their IRA funds to purchase stock in a closely held company in which he or she is an officer.
In addition, private investment managers should be aware that they could be subject to the Department of Labor’s plan asset rules if 25% or more of an investment company or 100% of an operating company is owned by IRAs. If the 25% or 100% threshold is met or exceeded, the assets of the investment company or operating company are considered to be assets of the IRA, and the investment manager or principle(s) of the company become fiduciaries to the IRAs (i.e., disqualified parties). When developing a plan to raise capital from retirement plans, you should consult with competent ERISA counsel regarding the plan asset rules.
For more information visit www.pensco.com
PENSCO Trust Company performs the duties of an independent retirement custodian, and, as such, does not provide investment advice, sell investments or offer any tax or legal advice. PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Financial professionals, investment issuers or sponsors interested in referring clients to PENSCO are encouraged to seek independent tax and legal advice pertaining to using retirement funds as a means to raise capital to ensure compliance with all applicable state and federal laws. PENSCO does not perform any such determination.