Case Study – Investing in Private Stock

Bob, an employee of Company “A,” was presented with a unique opportunity during the company’s quarterly meeting. He was informed that he was now eligible to purchase shares in the company’s private stock. This exclusive deal offered only to long-term employees permitted him to either directly own the shares in his name or utilize their tax-advantaged IRA funds for the purchase.

Private stock refers to company shares that are not traded on public stock exchanges. Private companies typically offer these shares, ranging from small startups to larger established firms.

Bob, who had sufficient funds in his Brokerage IRA, decided to use them for the stock purchase. However, he encountered a significant hurdle. His brokerage IRA did not permit private stock, posing a challenge to his plans.

Bob did his own research and discovered that he could open a self-directed IRA account with a non-traditional self-directed IRA administrator like Mountain West IRA. He discovered purchasing private stock through a retirement account rather than personally allowed him to tax defer the possible stock growth.  These are the advantages Bob found in his research and due diligence:

• Flexibility: A Self-Directed IRA is unique because it allows account holders to choose from a broader range of assets beyond what is typically permitted in a brokerage firm's IRA. Brokerage IRA accounts limit your choices to publicly traded stocks and other SEC-monitored securities. A self-directed IRA through an administrator like Mountain West IRA gives many more choices of options. A few examples are private placements, real estate, precious metals, notes, tax lien certificates, private stock and more.

• Tax Advantages: Just like other IRAs, a Self-Directed IRA through an administration company such as Mountain West IRA follows the same tax-advantaged growth as an IRA account through a brokerage firm or bank.  A traditional IRA with a third-party administrator allows the account owner to defer growth and gains until distribution after 59 1/2. A ROTH IRA allows the client to obtain tax-free growth and gains in their ROTH IRA.

• Custodian Requirements: Custodians or Administrators do all the accounting and reporting to the IRS. They act on behalf of the account owner to complete the transactions the account owner does in their IRA account and maintain the recordkeeping on the account.  

In summary, a Self-Directed IRA is an option that enables the account holder to purchase private stock tax-deferred or tax-free under IRA regulations.