What it is
An IRA (individual retirement account) is a tax-advantaged account type recognized under U.S. law. Many IRAs are held at custodians that offer a limited menu, such as publicly traded stocks, bonds and mutual funds. A private fund is a pooled investment vehicle offered privately rather than on a public exchange.
To hold a private fund in an IRA, people often use what is called a self-directed IRA. In this arrangement, a specialized custodian administers the account and may permit a wider range of assets. The custodian generally holds the account and processes paperwork, but it typically does not evaluate the investment or give advice on it.
Private funds are usually offered under exemptions from SEC registration, most often Rule 506(b) or Rule 506(c). Rule 506(b) does not allow general solicitation. Rule 506(c) allows general solicitation, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify that status. Many private funds are open only to accredited investors under SEC Rule 501(a). That definition includes people who meet certain income or net worth tests, holders in good standing of Series 7, 65 or 82 licenses, and, for a fund, its knowledgeable employees. It also includes spousal equivalents when applying the joint tests, and entities or family offices with over $5 million in investments or assets, as well as registered investment advisers and exempt reporting advisers. Whether an IRA itself qualifies, and how, depends on the facts and the fund's documents.
How it’s traditionally been approached
Traditionally, most people have held IRAs in mainstream brokerage or bank accounts and chosen from the investments those platforms offer. Others have sought a self-directed IRA custodian because they wanted access to assets outside that menu. Neither path is right or wrong; they reflect different goals, comfort levels and levels of involvement.
When a private fund is considered in an IRA, the usual steps involve opening or using a self-directed account, reviewing the fund's offering documents, completing subscription paperwork, and having the custodian process the purchase on the account's behalf. The investor generally remains responsible for their own decisions, and the custodian usually does not vouch for the fund.
Some people also review how a fund is structured, because tax treatment can differ. For example, certain fund structures may produce a Schedule K-1, and some kinds of income inside a retirement account can raise questions that people discuss with a tax professional. Section 1202 (QSBS) is a separate provision that applies to certain qualifying stock and has its own rules. Tax treatment depends on individual circumstances, so these topics are best reviewed with a licensed tax adviser.
How the right fund manager may help
The right independent fund manager may help you understand how their private fund is structured, what the offering documents say, and whether an IRA is a permitted type of investor. A good first conversation is usually about the fund's strategy, fees, liquidity terms and risks, and no one should pressure you to decide. Any offering is made only by the issuer through its own documents.
A fund due diligence professional may help you think through questions you might not know to ask. These could include how the fund is governed, who handles custody and administration, how conflicts of interest are addressed, and what reporting you can expect. Providers in the funds of funds and secondaries space may also explain how those approaches differ from investing in a single fund, and what that can mean for diversification and timing of access to your money.
Useful questions to bring include: Does this fund accept IRA investors, and what does its paperwork require? What are the fees and how are they charged? How and when can I get money out, if at all? What reports will my custodian receive? Which questions should I take to my own tax and legal advisers? Past performance does not guarantee future results, so be cautious of anyone who leans on it.
The bigger picture
Retirement money often carries emotional weight, because it represents future security and the years of work behind it. Choosing to place some of it in a less familiar structure can bring excitement, but also worry, especially if the money is meant for your later years. Taking time, asking plain questions and noticing how you feel about the answers are all reasonable parts of the process.
Your financial picture is only one part of wellbeing. Peace of mind, family needs and your comfort with uncertainty matter too, and it can help to talk with people you trust. If stress about money is affecting your health or relationships, a resource such as Providers.plus can help you find support for the whole person alongside your financial questions.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value, which is especially important when the money is retirement savings.
- Past performance does not guarantee future results, and nothing here is an offer to sell or a solicitation of an offer to buy any security.
- IRA rules, prohibited transactions and tax treatment depend on your individual circumstances, so consult your own licensed tax, legal and investment advisers.
- The Hastings Fund is an independent directory and educational resource. It is not a broker-dealer, funding portal or investment adviser, and it does not recommend, endorse or rank investments or managers.
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Create an investor account →Frequently asked questions
Can you invest in private funds through an IRA?
In some cases, yes. People generally do this through a self-directed IRA, whose custodian allows assets beyond the usual public market menu. Whether you can invest depends on the fund's own terms, your eligibility, and your custodian's policies, so review the offering documents and consult your own advisers.
What is a self-directed IRA?
A self-directed IRA is an individual retirement account held by a custodian that permits a broader range of assets than many standard brokerage IRAs. You, rather than the custodian, make the investment decisions. The custodian usually handles administration and recordkeeping and generally does not give investment advice.
Do you have to be an accredited investor to use an IRA for a private fund?
Often yes, because many private funds are offered only to accredited investors under SEC Rule 501(a). Whether an IRA qualifies, and by what test, depends on the account's facts and the fund's documents. Ask the fund manager and your own legal adviser how they treat IRA investors.
What is the difference between Rule 506(b) and Rule 506(c)?
Rule 506(b) offerings cannot use general solicitation, while Rule 506(c) offerings can. In a 506(c) offering, all purchasers must be accredited investors and the issuer must take reasonable steps to verify that status. Both are exemptions from SEC registration, not endorsements or approvals of the fund.
Are private funds in an IRA safe?
No investment is risk-free, and private funds are speculative and illiquid and can lose all of their value. Holding a fund in an IRA does not reduce the risks of the fund itself. Past performance does not guarantee future results, so read the offering documents carefully and speak with licensed advisers.
Are there tax issues with investing in private funds through an IRA?
There can be. Some fund structures issue a Schedule K-1, and certain types of income inside a retirement account may raise special questions. Tax treatment depends on individual circumstances, so discuss it with a licensed tax professional before you proceed.
Educational resource. The Hastings Fund shares general information and connects people with independent fund managers. It is not professional advice. Talk with a qualified professional about your own situation.