Can you invest in private equity in an IRA?

Key takeaways:

• You can invest in private equity through an IRA—and, if done thoughtfully, it may offer tax advantages, diversification, and alignment with your retirement's long time horizon.
• Access typically requires a self-directed IRA, checkbook IRA, or specialized custodian. Automated platforms like Heron Finance now streamline the process with low minimums and integrated IRA setup.
• Before investing, accredited investors should carefully weigh the tradeoffs: illiquidity, fees, potential UBIT tax implications, and the importance of not over-concentrating in any single asset class.

Table of contents:

• What is private equity and why consider it in a retirement account?
• How can investors access private equity through an IRA?
• Key considerations before investing in private equity in an IRA
• How Heron Finance makes it easier to invest in private equity through an IRA

Private equity has long been a cornerstone of institutional portfolios, offering exposure to privately held companies that aren't available on public stock exchanges. For individual investors, the appeal is clear: the potential for higher long-term returns and meaningful diversification beyond traditional stocks and bonds.

But can you actually invest in private equity through an IRA?

The short answer is yes. With the right account structure and platform, retirement savers can allocate a portion of their IRA to private equity investing strategies.

Here's what you need to know...

What is private equity and why consider it in a retirement account?

Private equity involves investing in companies that are not publicly traded. These investments are typically made through pooled funds managed by professional investment firms. The goal is generally to generate returns through long-term value creation in private businesses, whether through growth capital, buyouts, or other strategies.

Holding private equity in a retirement account like an IRA can be attractive for a few reasons:

• Tax advantages: Traditional IRAs offer tax-deferred growth, while Roth IRAs may provide tax-free growth. Either structure can be beneficial for investments that are designed to compound over long periods.
• Long time horizon: Since most investors don't touch their retirement funds for years or even decades, the longer holding periods typical of private equity may align well with that timeline.
• Diversification: Adding private equity exposure to a retirement portfolio may help reduce concentration in public markets and introduce a different return profile.

That said, private equity investments carry meaningful risks, including illiquidity, potential loss of principal, and long lock-up periods. They are not suitable for every investor or every retirement strategy.

How can investors access private equity through an IRA?

Investing in private equity through an IRA isn't as simple as buying a stock or mutual fund through a standard brokerage. It typically requires a specialized account structure. Here are the most common methods:

Self-directed IRAs

A self-directed IRA (SDIRA) is a retirement account held by a custodian that permits investments beyond the traditional universe of stocks, bonds, and mutual funds. With an SDIRA, investors can direct the custodian to invest in approved alternative assets, including private equity funds. The custodian handles the administrative and regulatory requirements, while the investor chooses the investments.

Checkbook IRAs

A checkbook IRA is a more hands-on structure where the IRA owns a limited liability company (LLC), and the investor acts as the manager of that LLC. This gives the investor direct control over investment decisions, including the ability to write checks from the LLC to fund private equity commitments. While this approach offers flexibility, it requires careful legal setup and strict adherence to IRS rules to avoid prohibited transactions.

Custodians specializing in alternative assets

Some IRA custodians focus specifically on holding non-traditional assets like private equity, real estate, and private credit. These custodians are experienced with the unique paperwork, capital call processes, and reporting requirements that come with alternative investments. They can be a good fit for investors who want dedicated support for this type of account.

Automated private market platforms

A newer category of solution has emerged: technology-driven platforms that partner with IRA custodians to streamline the entire process. These platforms handle fund selection, portfolio construction, and IRA integration in a more seamless experience. For investors who want access to private equity in a retirement account without navigating the complexity themselves, this can be the most straightforward path.

Key considerations before investing in private equity in an IRA

Before allocating retirement funds to private equity, there are several important factors to evaluate:

• Accredited investor requirements: Most private equity funds are only available to accredited investors, meaning individuals who meet specific income or net worth thresholds set by the SEC.
• Illiquidity: Private equity investments typically cannot be sold on short notice. Lock-up periods can last several years, and redemption timelines vary by fund. Make sure you are comfortable with limited access to your capital.
• Fees: Investors should be aware of fees at multiple levels, including management fees charged by the fund, fees from the IRA custodian, and any platform fees. Understanding the total cost structure is important.
• UBIT considerations: In some cases, IRA investments in private equity may generate unrelated business taxable income (UBTI), which could create a tax liability even within a tax-advantaged account. Consult a tax professional to understand how this may apply to your situation.
• Diversification: As with any investment, it is important not to over-concentrate in a single asset class. Private equity should generally be one component of a broader, diversified retirement portfolio.

How Heron Finance makes it easier to invest in private equity through an IRA

Heron Finance is an SEC-registered investment advisor that offers automated private market portfolios, including access to private equity strategies. The platform is designed to simplify the process of investing in private markets, and that extends to retirement accounts.

Here's how Heron Finance approaches private equity in an IRA:

• Streamlined IRA setup: Heron partners with leading self-directed IRA custodians such as AltoIRA, EquityTrust, and MidlandTrust. Investors can select the retirement account option during signup and be guided through the setup process. Investors with existing retirement accounts may also be able to roll over funds. Heron also supports checkbook IRAs.
• Access to established private equity funds: Through Heron, investors can gain exposure to 4 private equity funds representing over 10,000 underlying assets. These funds are managed by experienced fund managers with an average track record spanning 20 or more years.
• Lower minimums: Heron's $10,000 minimum investment is significantly lower than the minimums required to invest directly in most private equity funds, which can often be $100,000 or more.
• Automated portfolio construction: Rather than selecting individual funds, investors receive a portfolio recommendation based on their profile. This includes diversification across private equity and, optionally, other private market asset classes like private credit and private infrastructure.
• Dedicated support: Heron offers optional one-on-one support, so investors can speak with a team member at any stage of the process.

Heron Finance is available to U.S. accredited investors. To qualify, individuals generally need to meet at least one of the following criteria: individual income of $200,000 or more (or $300,000 jointly) for the prior two years, or a net worth exceeding $1 million excluding a primary residence.

Getting started

Investing in private equity through an IRA is more accessible today than it has ever been, but it still requires thoughtful consideration. The right approach depends on your financial goals, risk tolerance, time horizon, and overall retirement plan.

If you're an accredited investor interested in exploring private equity within a tax-advantaged retirement account, open an account with Heron Finance today.

FAQs

What is a self-directed IRA?

A self-directed IRA (SDIRA) is a type of individual retirement account that allows you to invest in a broader range of assets beyond traditional stocks and bonds, including alternative investments like private equity, real estate, and private credit funds. Like a standard IRA, it offers the same tax advantages — tax-deferred growth with a Traditional IRA or tax-free growth with a Roth IRA — but gives you far greater control over where your money is invested. A specialized custodian is required to hold and administer the account on your behalf.

Can you invest in private equity in an IRA?

Yes, you can invest in private equity through a self-directed IRA, making it possible to access institutional-quality alternative assets while keeping your money in a tax-advantaged account. The IRS permits SDIRAs to hold alternative investments as long as they're administered through an approved custodian and comply with IRA rules, such as avoiding prohibited transactions with disqualified persons. This means investors can potentially grow their private equity returns tax-deferred or tax-free depending on their account type.

How do you set up a self-directed IRA?

The process is straightforward — when creating an account on Heron Finance, simply select "retirement account" and you'll be guided to set up an IRA through one of Heron's partner custodians. The fastest option is AltoIRA, where you can create an account in under 15 minutes and then return to Heron to complete your investment. If you already have an account with a supported custodian like Equity Trust or Midland Trust, you can reach out to Heron's support team directly to get set up.

What IRA custodians for alternative assets does Heron Finance partner with?

Heron Finance currently partners with three custodians: AltoIRA, Equity Trust, and Midland Trust. Heron also supports Checkbook IRAs for investors who have already established their own structure.

This content is for informational purposes only and does not constitute an offer to sell securities, a solicitation of an offer to buy securities, or individualized investment advice. Private equity investments involve a high degree of risk, including the potential loss of the entire investment, illiquidity, and long holding periods. Past performance is not indicative of future results. Diversification does not ensure a profit or protect against loss. All investors should consult their own financial, tax, and legal advisors regarding their specific circumstances before making any investment decisions. Heron Finance is an SEC-registered investment advisor. SEC registration does not imply a certain level of skill or training.