Some of the best, and highest-return investment opportunities, you may encounter will often come in the form of off-market, non-public investments. These common off-market opportunities may include short term lending to a local real-estate developer, a secured or unsecured loan to a business, or perhaps a private equity investment in an early-stage startup you are exposed to. 

Whatever the opportunity may be, it’s important to realize that your retirement savings account may potentially be utilized as a source of capital for investment; all without penalty, and while providing tax-deferred gains in most cases. 

While the use of a check-book control IRA is not a necessity for these type of investments, Savvy IRA investors like yourself will often utilize the check-book control IRA to achieve greater flexibility and control over their investment activities. However, this freedom does not come without its risks of doing something that could land you in hot water with the IRS

That said, this article will explain some of the best practices when utilizing an IRA LLC/Checkbook Control IRA, to invest in off-market private lending and private equity investments.

Private Lending

After you have successfully established a check-book control IRA, you may then use this LLC as a conduit to conduct your private lending activities. When lending money as an investment through the IRA LLC  it’s important to adhere to the following:

  • Your IRA LLC may never loan to a disqualified person or disqualified entity.
  • The loans may be secured or unsecured at your discretion.
  • You and your borrower may negotiate terms of the loan, yet you may not receive personal compensation for your time and effort. 
  • The loan must be a true economic transaction. This means no sweet-heart or sub-prime loans. Treat every loan as an investment for the exclusive benefit of the IRA LLC.
  • The IRA LLC may utilize the services of a loan servicer and/or accountant to monitor and account for loan payments. Any contract for service must be drawn up between the servicer and the IRA LLC, and, the IRA LLC will compensate the servicer directly (no payments using personal money)
  • The IRA LLC Manager will sign all loan documents and legal agreements on behalf of the IRA LLC.
  • The IRA LLC Manager will oversee all expenses and revenue for the LLC.

Private Equity

When utilizing your IRA LLC to invest in other private equity opportunities it is important to remember that:

  • All equity purchase documentation must reflect the name of the IRA LLC as the investor/member; not you personally nor the IRA account’s titling.
  • The IRA LLC Manager may sign all investment-related documents and legal agreements on behalf of the IRA LLC.
  • The IRA LLC Manager may oversee all the administrative tasks associated with the income and expenses of the IRA LLC. 
  • The IRA LLC is responsible for all capital obligations set forth by the investment agreement with the private investment, i.e. capital calls, additional fundings, etc…
  • Your IRA LLC cannot invest into any entity which is owned 50% or more by a disqualified person/entity. As an example, your IRA LLC could not invest in your wife’s bakery. 
  • The investment may result in a prohibited transaction if the IRA account owner has an operational role with the private company. This is largely subjective and will be based on your role, the company size, and the ownership held by your IRA LLC. Therefore, it is best to speak with competent legal counsel prior to investing in a company in which you are currently employed. 
  • Beware of self-dealing. This is broad, yet a best-practice is to only make investments with your IRA LLC’s funds with the IRA LLC’s best interest at hand. Never make investments with immediate self-serving intent. 

While these best practices will keep you out of hot water with the IRS 95% of the time, there may come a scenario that does not align with these general guidelines. In those cases, it is always recommended that you seek competent legal or financial counsel before proceeding.