Two important considerations apply before committing plan funds: who controls the company, and how the investment generates its return.
Disqualified person restrictions
Your plan cannot invest in a company that you or a disqualified person owns or controls. The IRS defines control two ways: equity control: a 50% or greater ownership interest held by you, your spouse, lineal family, or entities they control in combination, and executive control, meaning a disqualified person serves as a director, officer, or equivalent role with day-to-day decision-making authority over the entity. Either condition is sufficient to disqualify the investment.
One additional restriction: IRAs may not invest in S corporations. S corporation rules limit shareholders to US citizen individuals and certain trusts, a restriction imposed by the tax code, not the IRA rules. This has no bearing on C corporations, LLCs, or limited partnerships, all of which are eligible investment structures.
UBIT considerations
How a company is taxed determines whether your plan's investment creates exposure to Unrelated Business Taxable Income (UBTI).
C Corporations are taxed at the entity level. Income to your plan arrives as dividends (passive income) and is fully sheltered. There is no UBIT concern.
LLCs, partnerships, and other pass-through entities do not pay tax at the entity level. Operating income passes through to the plan, and if that income is from a trade or business, it constitutes UBTI, subject to Unrelated Business Income Tax (UBIT) at trust tax rates.
The practical impact depends on where the investment return is expected to come from. If the primary objective is eventual equity gain, a future funding round, acquisition, or IPO, UBIT on modest operating income along the way is often manageable and may be offset by early-stage losses. If the primary objective is ongoing operating income from the business, UBIT substantially reduces the appeal of holding that investment inside a retirement plan. Consult a tax advisor before committing to a pass-through business investment where operating income is significant.
How to invest
The mechanics parallel any other private placement:
- Execute the subscription agreement, membership interest purchase agreement, or stock purchase agreement in the name of your plan entity. You sign as manager or trustee.
- Wire capital from the plan entity bank account directly to the company.
- Distributions of income or return of capital are issued to the plan entity and deposited to the plan account.
Most private equity investments require accredited investor status. Your plan inherits your status, see Does my plan qualify as an Accredited Investor?
Frequently Asked Questions
Can my plan invest in a startup where I serve as an officer or director?
No. Serving as an officer, director, or in any role that carries day-to-day executive authority over a company makes that company a disqualified person to your plan, regardless of your equity stake. The same applies to your spouse and lineal family members. If you or another disqualified person holds executive authority over the company, your plan may not invest in it.
Can my plan invest in a company where I am a minority owner personally?
Possibly, if your combined personal ownership with other disqualified persons remains below 50% and no disqualified person holds executive authority over the company. Any transaction between the company and your plan must be entirely arm's-length, and your personal ownership cannot create an indirect benefit to the plan. This is a fact-specific analysis that warrants legal review before proceeding.
Can I take on a role as an employee or consultant with a company my plan has invested in?
This is genuinely tricky. While a disqualified person holding an executive role disqualifies the entity, an employment or consulting arrangement raises a separate concern. The plan's investment may have created or facilitated the opportunity for personal compensation, which the IRS could treat as an indirect benefit flowing from the plan to a disqualified person. The more your plan's participation appears to have secured your role, the greater the prohibited transaction risk. If you are considering any compensated role with a company your plan has invested in, consult qualified legal counsel before accepting that arrangement.