Directed IRA Podcast

Use Your IRA to Invest in Private Funds

• Mat Sorensen and Mark Kohler

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Did you know you can use your IRA to invest in private funds? These include private equity, venture capital, hedge funds, and real estate funds.

Private funds have become one of the most popular investments among self-directed IRA owners because they offer access to professionally managed strategies, broader diversification, and the ability to passively invest in high-growth sectors—all within a tax-advantaged account.

In this episode, "Use Your IRA to Invest in Private Funds," Mat Sorensen and Mark J. Kohler explain how private fund investments work inside an IRA, what separates a legitimate fund from a risky one, and why understanding the fund’s documents, liquidity restrictions, and management team is essential before investing.

If you're looking for greater control over your retirement investments, this episode will give you the framework you need to evaluate private funds and avoid common mistakes. Book a call today to learn more: directedira.com/appointment.

  • 0:08 - Investing IRAs in Private Funds
  • 3:00 - What Defines a Legitimate Fund
  • 6:00 - Understanding Accredited Investors
  • 10:00 - Due Diligence and Investment Documents
  • 16:12 - Subscription Process and Liquidity Concerns
  • 22:09 - Exit Strategies and Final Thoughts

Directed IRA Homepage: https://directedira.com/

Directed IRA Explore (Linktree): https://linktr.ee/SelfDirectedIRA

Book a Call: https://directedira.com/appointment/


Other:
Mat Sorensen: https://matsorensen.com & https://linktr.ee/MatSorensen
KKOS: https://kkoslawyers.com
Main Street Business https://mainstreetbusiness.com



Speaker 1:

Welcome everyone to the Directed IRA Podcast. This is Matt Sorensen, joined by the incredible, very dapper Mark J Kohler. Today we're excited to be talking to you about investing your IRA. I know you may not have thought about this before, but investing your IRA into a private fund, not just a public stock.

Speaker 2:

I think this is a topic that's becoming more and more relevant for people because of the influencers out there, because you're nobody until you have your own fund, and so if you're out there following your favorite real estate guru or biotech guru or crypto guru or whatever they're like, oh we got a fund for you, you know, and that's okay. But there's a lot of opportunity out there to invest in a regulated, sec-approved fund. We're going to talk about that where your IRA can maybe get a better ROI, being on the front end of something that's private, not, you know, picked over by Wall Street.

Speaker 1:

Yeah, and there's a lot of variety to it, from risk factors and reward and returns. Of course, here's not meant to be investment advice, but we want to talk about the options and how your IRA can actually play in this. We have clients investing in a private fund every hour here at Directed IRA from their IRA account, and a lot of people may have even invested in a private fund with personal dollars, didn't know they could do with an IRA, or you might've never invested in a private fund with personal dollars, didn't know they could do with an IRA, or you might have never invested in a private fund in general. We're going to kind of cover both of those topics here and try to give you some understanding of what the options are and what's out there. So the first thing I want to say is we talk about a private fund. This could be, like Mark said it could be a crypto fund. This could be a real estate fund. This could be a private equity fund. This could be a real estate fund. This could be a private equity fund. This could be a venture capital fund focusing on startups. This could be a hedge fund doing some unique trading strategies.

Speaker 1:

All of these really are private funds. At the end of the day, and when you're investing in this, whether you're using your individual dollars or an IRA you're one investor in this fund. This fund could be an LLC or a limited partnership, and you're an investor in the fund and someone's running that fund making the decisions, Kind of like. You might be familiar with the mutual fund. I put my money into this mutual fund and there's some fund manager picking which stock to invest in.

Speaker 1:

But these private funds are going to be. Hey, there's a fund manager, a general partner or manager running that fund, and maybe it's a crypto fund and they're deciding what crypto to invest in. Maybe it's a real estate fund. They're deciding what real estate to invest in. Are they doing multifamily industrial storage? Maybe it's a private equity fund and they're buying companies. They're doing buyouts, so they're doing growth equity. Maybe it's a venture capital fund and they're picking which startups to invest in and they hope one out of 10 of them goes well, but they buy 10. And so there's different varieties of these funds, but the nice thing is your IRA can invest in all types of those funds.

Speaker 2:

Now I actually want to take a different angle and say what is not a fund. And this can be precarious because we just mapped throughout the I word investor. This is the one time you get to use that word, because if you're in a fund, you really are an investor in the eyes of the Securities and Exchange Commission federal and states and you are going to be treated like an investor. They're going to do all the work, you're going to get some profit based on the fund agreement, the operating agreement, the prospectus there's a lot of different words there we'll throw out but you're an investor at this point, when you're not in a fund. This is a key point, because you're going to be out somewhere. Hey, do you want to invest with me? Oh, you've got a fund. Well, no, I'm just forming an LLC. Well then, I'm not an investor, I'm a partner with you. Well, I don't want a partner, I just want a silent partner that does what I've already said, that's when your little bells go off Ding, ding, ding ding. This idiot doesn't know what they're doing. Because you cannot just go raise money and call people investors without going through the proper fund setup process. That's how people end up in jail.

Speaker 2:

So I like to say a fund is legit and you want to be looking for that. And whenever you hear something that's a little odd, oh, do you want to invest with me? Or let's do an LLC, you'll be my investor. I'm raising money for my project. You always want to go. Oh. So you have a fund. You're calling me an investor Pretty soon. You already know more than they do and that's a person you want to go bye. So I think this is an important issue and many of you are savvy out there. You're going to be an accredited investor, but you kind of need to weed through all the crap out there to make sure you're dealing with someone legit too.

Speaker 1:

Yeah, and many people with their IRA are like no, I'm doing deals direct. My IRA is buying real estate, it's investing in a business direct. It's lending someone money where my IRA is the lender. Maybe I'm partnered in an LLC where my IRA is the cash partner with some other operator of a business or some other investment, but we have a partnership and I got voting rights. But when you come over here to private fund, you're basically investing your money and some general partner or management team is going to run that thing and you don't really have a say.

Speaker 1:

Okay, so you're hoping they do well, and obviously you want to make sure you're picking the right investments, just like when you're buying a stock, right, you can't go into the boardroom or go to talk to the CEO of that company and tell them what to do either. Okay, like you basically have no control. So a couple of things to note about that investment. Now, where is a lot of the big money gone? And the quote unquote smart money. What has the wealthy people done? They've invested in a lot of private funds. Okay, and so they, because a lot of these private funds whether it's private equity or the different classifications have generated better returns, and so a lot of people have been attracted to those private funds because they're trying to get better returns or diversification from the stock market. We're not here to pick your investment thesis. We're just trying to say did you know your IRA could also do this? Your IRA could also play in this game.

Speaker 2:

A key term. Let's start to get into some of these terms. Some of you may have not thought your IRA could do it because you had to be an accredited investor to get into I'm going to say 99% of the funds. A fund has to be regulated in the way they advertise and they take money and what they give their investors so they can do their due diligence and their promises. And that's what the SEC is trying to do.

Speaker 2:

In 1933 and 1934, they passed the Security Acts because so many people ripped off during the Great Depression. That's when we see the stories and hear about people jumping out of buildings in New York City because they had taken people's money with very limited crazy promises, with very limited information and a lot of people lost their money. So the federal government said we're not going to allow that again. So we're going to create the Security and Exchange Commission now, almost 100 years ago, and we're going to have regulations. Now it it's evolved and there's laws that get passed all the time on how these funds and how the SEC manages investments.

Speaker 2:

But that's why they bring up the topic of an accredited investor, because people want to advertise, they want to raise money for their fund and when they do that the only people that can invest with them have to be savvy. They don't want to take away grandma's last $50 or $500 or $5,000. And so that's when they ask are you an accredited investor? Well, you, the IRA owner, are the ones that qualify if you're an accredited investor and then can designate your IRA to be an investor if you want.

Speaker 1:

Yeah, so instead, another way if you qualify as an accredited investor personally, your IRA qualifies as an accredited investor. Now, to be an accredited investor, this is a million dollars of net worth and this is not including your home not including the equity in your home or 200,000 annual income If you're single, 300,000 annual income if you're married.

Speaker 1:

So you can qualify either way. It's not both either qualifying the income test or the asset test. Now there's other ways. There's some testing and stuff for certain licensed professionals and some other ways to get at it. But most people are going to qualify either under the income or asset test and if you can, you personally qualify, then your IRA qualifies.

Speaker 1:

Now when you're investing into a private fund, there's going to be a number of documents, and Mark talked about some of the SEC rules, so you're going to need to get familiar with some of these documents. There's typically an offering memorandum. Sometimes it's called the PPM that's kind of the old lingo on this but it's typically called an offering memorandum because a lot of these funds are advertising. Now they're soliciting and they can, as long as they only take accredited investors, so that's under what's called Rule 506C. But these funds are what are called exempt offerings. They're technically not SEC registered, although they do file something to the SEC, but they're not like SEC approved or registered offerings. Most of these, so in these Reg D offerings is what they're called, where you typically see even some of the private equity funds or the venture capital funds, definitely most of the real estate funds and syndications you'll see out there.

Speaker 1:

The crypto funds these are mostly going to be what are called reg D offerings, where you need to be an accredited investor. But they have an offering document that kind of goes over what's their thesis, what are they doing, what are they planning to invest in, goes over the management team, some risk factors, and then there's also going to be an actual LLC operating agreement and it could be a limited partnership agreement, but you're seeing more and more it's an LLC operating agreement and then you see what's called a subscription agreement. Those are going to be the key documents you're going to see in the process and your IRA custodian, including directed IRA we need a copy of those documents. If your IRA is investing, we need a copy of those documents and I'll come back to what needs to go on the subscription agreement here as we get into some process here. But those are part of the documents you'll see when you're investing into a private fund.

Speaker 2:

Yeah, and I would say we've got to bring up the word due diligence. Due diligence the first time you're ever investing in a fund, I would recommend you really go get your favorite caffeinated drink, saddle up to the kitchen table and lay this stuff out. Start looking at it. Warren Buffett said this in a variety of ways If he doesn't understand the deal, he doesn't do it, and you need to understand what this fund is about. Sometimes I've had many people talk to me about investigating not what they're doing, but who the people are behind it. So investigating who are these fund promoters? Who's going to run the fund? What's their idea? How do you get money? When do you get money?

Speaker 2:

Start to understand that and it's going to be pretty legalese a lot of garbly goop but do your best to understand it and you don't have to understand it fully, but enough to know it feels good. It's got to feel good in your gut and you've got to be able to understand it in your mind. If one of those is off, don't do it. There's another freaking fund around the corner. Just go on Instagram. Some influencer is going to be pimping out their fund, so it's fine, but don't go into analysis. Paralysis is what I'm saying too, where you're like well, I don't understand, I'm not going to do it. Well, okay, slow down, tiger, you freaking got to go to law school for three years and I still can't even understand half of these subscription agreements. So be patient, but you got to at least know what the hell you're doing.

Speaker 1:

Yeah, and I think, getting familiar with what's their investment thesis, like what are they doing? Do you agree with that? They're buying multifamily properties in the Southwest. Do you think that's a good strategy? Why is that a good strategy? They're buying storage units in the Midwest self-storage Okay, that's a good strategy. They're doing these types of cryptocurrencies, or have this perspective on crypto, and they're using this amount of leverage, or they're not? So get an understanding of what's their investment thesis. What are they actually doing? I love understanding the management team and the people that are behind it, because those are the people that have to execute on this idea and you're putting some faith and trust in them. Of course it, because those are the people that have to execute on this idea and you're putting some faith and trust in them.

Speaker 2:

Of course, can I add to that again? I know, matt, you've got stories as I do. You may think, oh, because it's a fund, the SEC has made sure this person's okay, no, this is not a registered security. It's under the Securities and Exchange Commission and they're kind of like the redheaded stepchild. You know you've got to submit these things and it's going to get listed and the SEC is going to track it for you and make sure those documents get to you, but they're not there to approve the people or the investment. So just because it's a fund and there's lawyers behind it doesn't make it like legit, a great idea, or that the people are good people and Matt and I have had story after story. You start Googling some of the key operators of these things. Oh, investigate for this, investigate for that criminal, this criminal that You're like. Oh my hell, you've got to do it. You should Google every one of the people in those documents.

Speaker 1:

Yes, yeah, do some due diligence, some basic stuff in there, and that's not the job of your IRA custodian, that's on you. I mean, this is a self-directed account. If you have an advisor or a lawyer, of course they can be helping you through this and you're paying for their services. But the IRA custodians aren't like approving any investment, necessarily. That's not our job here. You want to invest in something we don't know and aren't making an assessment of whether it's a good idea or not. You don't pay us enough for that and that's not what our expertise is.

Speaker 2:

Yeah, matt said self-directed. Okay, did you? You guys got that? Okay, just want to make sure, yeah.

Speaker 1:

And I think you'll see sometimes in the fund space too, as you get into some of these larger funds in particular, they're a little more exclusive on how you can invest is they might have a due diligence report they might have. They might be on some minimums, like, yeah, they might have the minimums too, though they're going to be like $500,000,. You know A lot of minimums you'll see in some of the smaller private funds might be 50 grand. I mean, we see some private REITs that we do quite a bit, quite a bit with. That might have a 5,000 or $10,000 minimum. But I think 50 grand is kind of the minimum you'll see on the low end.

Speaker 1:

But some of these bigger private funds are a little more harder to get into. That might have a lot more due diligence. It might a lot more infrastructure. That might have an annual audit and things like that. We're going to typically have a higher minimum and you may even need an advisor to get in on them. Those could be ones with I capital or case. That are some of these aggregators of private funds and private opportunities which you can use your IRA to do, and we've had a lot of clients do that as well.

Speaker 2:

Yeah, and let's just talk practically here too. And I'll give my take on this and, matt, you do yours. Let's say you're out there and all of a sudden you're at an event, you're talking to your buddy, you're golfing, you're on Instagram, whatever the hell and you see this fund that you're interested in, okay, and you may just listen to the show and go. You know what I need to do? More of that. I'm going to allocate X percent or X dollars in my portfolio to some private funds. I've seen them out there. I'm ready to apply myself and we want to give you that encouragement that this is your world. You get to control and direct your own ship. You get to captain it.

Speaker 2:

So first, make sure you got your account open, directed IRA. All your money's over there, you're ready in that account. You're ready to poise and pull the trigger when you're ready. Number two don't call us until you've gotten a copy of the fund documents and you've started to look through them. You've done your due diligence. Look at the timeline what is the minimum and when's their deadline, so that when the time comes you can go. Okay, I'm now ready. Then you get to us at Directed IRA. You download the proper form to make that direct investment, send over the documents we need. We give you a whole checklist and then boom, you're off to the races. Now I may have oversimplified that, matt. You want to maybe give some thoughts on the timeline of that too, but you can be doing your due diligence while you're getting your money pooled and ready to go.

Speaker 1:

Right, yeah, and, like Mark said, you open your account here because your brokerage account at TD Ameritrade is not going to let you invest in the private fund, right, your local bank or credit union IRA is not going to let you do that. Your old employer 401k sure isn't going to let you do that, and so you need the self-directed IRA, and that's what we do and can get your account open here, where we let you invest in a private fund. So the main thing, when you're getting into the documents and you're like, all right, let's go for this, I like this, I like the people, I like the thing that they're doing, I've determined the amount of money I want to allocate to this, then of money I want to allocate to this. Then you're going to start filling out the subscription agreement. This is basically the agreement to say, hey, I'm investing in this thing.

Speaker 1:

Now, the first thing to make sure you understand is you're not buying these shares. Your IRA is. So the subscription or purchaser on this agreement is your IRA, which would be directed trust company FBO, matt Sorensen IRA, for example, if this was my IRA investing, or Matt Sorensen IRA if it was my Roth IRA. It's not Matt Sorensen, it's your IRA, so that vesting needs to be in the name of your IRA. And then there's an EIN number that's used too. This is directed EIN. We have a reporting EIN that we give our clients. It's on our documents when you're making this investment so you can grab that EIN. It's not your social. Don't put that because you don't want a K-1 going to you personally. You want it going to your IRA later on, okay. And so there are a few things that we see that we're always kind of helping guide clients on. That would be.

Speaker 1:

The first two things is making sure you're distinguishing this investment as being from your IRA versus you, which is put in the IRA's name, and use the EIN for directed IRA. When you're doing the investor questionnaire to qualify as an accredited investor, it's in your name, okay. And if you and, as Mark said earlier and as we talked about, if you qualify personally as an accredited investor, your IRA qualifies, but your IRA is the actual investor and our team here can help you through that. Of course, we're familiar with these. These documents are common in private funds and if it's your first time doing or whatever, we can help you at least understand what goes into the forms. We're not going to give you investment advice or say do this or don't, but we'll help you understand which the typical things you're going to need to include in the documents. Then, once we have that, you're going to say why are this amount of money there? It gets countersigned by the investment fund and you're invested.

Speaker 2:

Yeah, and I just have two thoughts. One, don't get overwhelmed again with the copious amount of paperwork. It's going to be a little shocking, some of these subscription agreements and operating agreements, and they go on and on. I mean it's going to look like a home mortgage or more. So it can be overwhelming, but go in saying who are the people behind this, what's their idea, what's their promise, what's their plan? And do your due diligence as best you can and when you're ready to do the documents. Our customer service is amazing. They're going to help you understand what to fill out, how to go through the steps. Don't stress about that, so keep your anxiety to a minimum.

Speaker 2:

The second point I was going to make this is probably the biggest hang-up for me. I want to know the exit strategy. How long is this fund going to go on? How in the hell do I get out? When do I get out? You know and I'm you know, matt I'm still stuck in a freaking fund that we did with my dad, and you know you knew my dad personally, yeah, and he died seven years ago and we did a fund probably two or three years before he passed away. I'm still trying to get my money out of it and you know the company I'm talking about and it just drives me nuts. And so you need to know what that exit they're at least promising for and really be okay with that, because this is not like you can go on your TD Ameritrade app and sell it when you want out. That's not happening. This is a private fund.

Speaker 1:

Yeah, and so you have some illiquidity in this. Of course, you have to understand that when you're investing in a private fund this is why you shouldn't put all of your investable cash in this, of course or if you're at your retirement account and you're 65. You should not be dumping it all into this private fund because it is illiquid and so not to mention just from an investment standpoint and risk and all that. So make sure you understand this is a long-term perspective on this and understand the liquidity issues you have. Now there is again the upside. Typically that private funds would promote, and why they've still attracted a lot of investment dollars, is they've generated higher returns and if they can generate a higher return despite the illiquidity, that can be a good thing for you in the long run. But this is not something you're going to access and try to get your money out next year. So make sure you have a long-term perspective on this. This is why we've seen a lot more people actually think of their IRA for private funds. Is they're like I can't touch this money until I'm 59 and a half anyways, and I'm not planning to touch it until I'm 70. So if I'm 45 or 50 right now, I'm thinking I could put that in a private fund. I'd rather my IRA be in this private fund and growing, not to mention the tax benefits, than my personal cash that I might not like to have tied up as much in a long-term type format. So, but definitely a good point there.

Speaker 1:

On the liquidity, make sure you understand that Some funds that we see will have some redemption options, but those aren't guaranteed. They'll say, hey, we have an option to get redemptions quarterly where you can take your money back out or effectively sell back to the fund, but those are never guaranteed either and they might be in an asset. Let's say they bought real estate that they got upside down on, so they're trying to wait it out, and meanwhile your money's tied up because they can't sell the thing and so they can't refinance. Right now the rates aren't great, so they can't refinance to get your money back. So there could be some issues where you run into some liquidity down the road too. So it could be yeah.

Speaker 2:

I think the best way to get out is just make sure that you could sell your interest to someone else. And then you think of that brother-in-law that you really don't want to hang out with anymore. You've kind of had it with him. You know he's a jerk at all the big get togethers and you're like I'm done holidaying with this brother-in-law, and then you sell it to him, yeah, and that's a great fix. And then you're out and you're not going to see him anymore because he's going to be so mad at you that it'll just resolve itself and you're going to be like, great, I didn't want to see him.

Speaker 1:

Anyways, it's called the brother-in-law switch. It's a little switcheroo there, you do. I mean, he deserved this and the good investment. Of course you're just going to keep and let the money ride.

Speaker 2:

Investment, of course you're just going to keep and let the money ride. It was funny when you were saying liquidity. I was like I've got to look at my crypto Roth 401k, because we have those here For those that are just kind of like the fund people. You may be a crypto investor too, and boy has it been a fun July. I'm at an all-time high today, Matt. I turned my screen around to show you, but then people would see it, so I'm really excited. So, having a good day on that front.

Speaker 1:

Yeah, it's all pros and cons in the investing world. Guys, that crypto can go to zero tomorrow, but that real estate deal, it's probably hard for that rental property.

Speaker 2:

Yeah, this is Matt Sorensen that bought Bitcoin at $2,500 telling you this, so you know. Whatever, take it with a grain of salt.

Speaker 1:

I'm still not all in on it, though you know again, not any investment advice here. Well, we wanted to make sure we hit this topic. On private funds, it is like the second most popular investment someone will do with their self-directed IRA. Here, like I said, we're processing an investment from someone's IRA into a private fund, probably every 30 minutes, I'm like every hour. It's probably even maybe 15. I don't know, but it's a very popular way for someone who wants to get some private market access, whether that's in real estate, oil and gas, crypto, venture, private equity, hedge, whatever those investment strategies or those categories are. Doing it through a private fund option rather than in the stock market has been very popular and it continues to grow over time, so we think it's going to be more and more popular amongst self-directed investors.

Speaker 1:

We want to get a little more content out on this Now. We've got a lot more on this. There's a whole chapter in my book, the Self-Directed IRA Handbook, on this. Again, we've got an incredible team here that can help with questions. If you're new or opening an account to this at directediracom, get over there. You can book an appointment with our team and please make sure you're subscribed to the podcast. If you liked it and you've learned something here, please share with your friends. Give us a five-star review, thumbs up, whatever it may be, and we'll see you next time. Until then, stay calm.

Speaker 2:

Self-direct on See you next week and Stay calm, self-direct on. See you next week and thank you everyone for listening. A quick disclaimer and reminder this presentation does not constitute an attorney or CPA client relationship and it is always in your best interest to consult competent legal and tax professionals when conducting your own personal transactions.

Speaker 1:

We also want to make sure you know this is not investment advice or financial advice. We're just trying to give you education, ideas and strategies you can take to your professionals or conduct your own research on. We'll see you next time.