Can an IRA invest in a hedge fund?
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Often, through a self-directed IRA with a custodian that holds private funds, but there are three catches. Prohibited transactions: your own or your family's IRA investing in a fund you run and are paid from can be self-dealing. Taxes: if the fund borrows to invest, the IRA can owe tax on that portion (UBTI). And the 25% line: if retirement accounts and plans own 25% or more of any class, the fund's assets can become plan assets under ERISA, making the manager an ERISA fiduciary.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- IRAs invest in private funds through self-directed IRA custodians.
- A manager's own or family's IRA investing in the manager's fund can be a prohibited transaction (IRC 4975).
- Debt-financed income can create UBTI for an IRA (IRC 514).
- If benefit plan investors, IRAs included, hold 25% or more of any class, fund assets can be plan assets (29 CFR 2510.3-101).
- Plan-asset status makes the manager an ERISA fiduciary.
Transcript
Founder: An investor wants to put his IRA into my fund. Is that allowed?
Operator: Often, yes. Through a self-directed IRA, with a custodian that holds private funds.
Founder: What's the catch?
Operator: Three. One: prohibited transactions. Your own IRA, or your family's, in a fund you run and get paid from, can be self-dealing.
Operator: Two: taxes. If the fund borrows to invest, the IRA can owe tax on that slice. It's called UBTI.
Operator: Three: the 25% line. If retirement accounts own 25% or more of any class, your fund's assets can become plan assets under ERISA.
Founder: And then?
Operator: Then you're an ERISA fiduciary, with a lot more rules. So most funds watch that number closely.
Founder: So an investor wants to put his IRA in...