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Private Equity and Your IRA: The Pathway to Tax-Advantaged Returns
Written by Jay Turo on Tuesday, September 22, 2009
Individual Retirement Accounts, or IRAs, in all their forms - traditional, Roth, 401k, Defined Contribution, Simple, SEP, 403(b) and 457, have become increasingly popular vehicles for private equity investing.
For the individual investor, Investing in private equity via a "Self-directed" IRA has a number of key advantages:
First and foremost are tax savings - both at the time of investment and as the investment appreciates. In some circumstances - for pre-tax contributions via a SEP-IRA for example - up to $49,000 can be invested on a pre-tax (i.e. tax deductible) basis.
Secondly, the power of tax - free compounding of interest, dividends, and capital gains - via both traditional pre-tax IRAs as well as the increasingly popular (and increasingly tax-advantaged) post-tax Roth IRAs is enormous.
In high-return and payout scenarios, where there are larger cash dividends and/or capital gains paid on an annual basis, the value of tax free compounding can lead up to a doubling of total investment return when compared to taxed compounding.
And thirdly, investing in private equity via an IRA addresses "de facto" arguably the key negative of private equity investing - its illiquidity. This is because, to encourage a long-term, retirement-focused time horizon, under the IRA umbrella there are significant, structured penalties for early withdrawl.
In short, IRAs are ideally designed to house long-term investment assets with high capital appreciation potential. This is, of course, the core objective of almost all private equity investing.
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