How to Evaluate Crowdfund Investments for Your IRA
Investing in crowdfunded ventures can be a great way to put your self-directed retirement plan to work. As we discussed in prior articles on the topic, these opportunities have many benefits — including the ability to invest with smaller amounts of capital, risk mitigation through diversification, and being easy to manage.
However, choosing the right crowdfunds to invest in can be a complicated matter. A thorough and educated evaluation of such investments is key to ensuring the best possible results for your self-directed IRA or Solo 401(k) plan.
Best Types of Funds for IRA Investors
Before diving into the details of how a particular fund is run, it makes sense to start by choosing funds that are well suited for retirement plan investors.
Not all crowdfunds are appropriate, such as those that may create exposure to taxation on Unrelated Business Taxable Income (UBTI). Following are a few of the main issues you should be aware of.
Accredited Investor Requirements
Some funds are only open to accredited investors. Accreditation requires that you have a certain combination of income and net worth, and is meant to ensure a certain level of sophistication when it comes to investing.
Your self-directed retirement plan inherits your accreditation status. If you’re not accredited, then there’s no sense spending time evaluating these types of ventures.
Unrelated Business Taxable Income Generating Funds
When in receipt of income produced by participation in a trade or business conducted on a regular or repeated basis, tax exempt retirement plans are subject to tax on Unrelated Business Taxable Income (UBTI). The top end tax on UBTI can be 37%, so it’s generally best to avoid such ventures.
Funds that produce income from rents, interest or dividends will not generate UBTI, as these are all forms of passive income. However, real estate related funds that engage in new construction of properties for sale or property flipping will likely create UBTI.
Funds that hold an equity stake in an operating business providing a product or service will also likely generate UBTI if the underlying business entity is a pass through for taxation such as a LLC or LLP. Ownership of shares in a corporation paying dividends to investors will not have tax exposure.
Unrelated Debt-Financed Income Generating Funds
Income produced via the use of debt-financing can also produce tax liability for retirement plan investors.
Tax exempt entities are exposed to Unrelated Debt-Financed Income (UDFI) when leverage is used. In this case, the portion of income that the plan receives via access to the non-plan (borrowed) capital is what is taxed.
The tax implications of UDFI are not always a deal-killer. The impact of this type of taxation may be relatively minimal, and such investments can still produce a quality return even after subtracting the tax cost.
That said, if there are two reasonably equal opportunities and one generates UDFI while the other does not, it would make sense to look more closely at the venture without UDFI exposure. UDFI can be common in many real estate funds, where income properties are being acquired with a combination of investor capital and mortgage financing.
Other types of funds may also use a combination of investor equity and debt, and UDFI will be generated as a result. An IRA investor would be exposed to UDFI in all such leveraged investments.
A Solo 401(k) has a narrow exemption for debt-financed income where the debt is associated with the acquisition or improvement of real property.
Once you have identified one or more funds that you find suitable for your IRA, it’s time to move on to performing diligence on the investment itself.
Vet the Platform
Quality and experience of leadership is one of the most important factors to consider when evaluating a crowdfund. You’ll want to know who the key team members are, and what kind of experience they have in managing the asset class or project type the fund is investing in.
You should be able to learn what level of success the fund principals have achieved in the past, and what kind of relevant licensing or certifications they may hold.
With funds that have been around for some time, there will be a track record of performance on prior ventures or funding rounds. Depending on the nature of the fund investment, it may be necessary to delve deeper into the operations of a venture, most notably when investing in a startup or business as opposed to an asset-based fund such as real estate equity or debt.
In a business venture, you’ll want to understand important factors such as the business plan, management succession plans, how principals are compensated, and the like.
What Diligence Processes is the Provider Using?
In many types of crowdfunds, the fund operator is aggregating a multiple of underlying assets such as properties or notes. A venture or angel fund may be acquiring interests in several underlying businesses.
One way to judge the quality of a platform is to understand the steps they take in performing diligence on the investments they are making.
Some funds are much more thorough and transparent about how they evaluate opportunities. The more you understand about how the fund operator selects suitable assets or ventures, the more confidence you can have with the fund itself.
The type of underlying diligence will vary based on the asset class. The more important consideration here is that you have insight to what the diligence process is and how it is conducted.
Some key things to look for include: background checks on significant counterparties, evaluating creditworthiness of borrowers, thorough title searches, and the like.
Asset Selection Control
Some funds are very narrow in scope, and may give investors a clear picture of exactly what is being held by the fund. Other funds — especially in the real estate and note spaces — operate more broadly and only let you know the type of deal being invested in, but not the specifics of individual deals or assets.
A fund that acquires one or a small number of large commercial properties would generally give you an opportunity to look specifically into the assets, the funding structure and business plan. A fund that invests in a broad portfolio of notes or single-family rental properties may be less transparent.
The more you know about underlying assets and the process of acquisition and funding, the more control you have over risk assessment. Otherwise, you’re essentially trusting the fund manager to get it right.
What is the Underlying Security?
Just because a fund invests in properties or notes doesn’t necessarily mean that your investment in the fund is directly secured by those assets. Understanding the configuration of a fund and how your investment is secured is critical.
Some arrangements such as Borrower Payment Dependent Notes, are not actually secured by the underlying asset and are really just a contract between the investor and the platform. If borrowers fail to pay or the platform itself goes out of business, individual investors will be pretty much at the back of the line when it comes to claims against the platform.
Exit Strategies and Liquidity
Getting into an investment is one thing — getting back out again is also a very important consideration.
Many funds may have a set time frame of existence, with little or no opportunity to exit prior to fund termination. In other cases, you may be able to exit early, but with some kind of penalty.
Be sure to ask questions about both normal and early termination options. With retirement funds, you’re generally looking at the long term anyway, but there can be life events that may require access to liquidity.
Downside Risks
It’s always important to know what happens if things don’t go as planned. Not all funds will be transparent about failure plans, but you need to think about this topic before investing.
Knowing what your investment is actually secured by is the first step in this evaluation. Equity in a fund vehicle may not be worth much if you do not have a clear claim on the underlying assets of the vehicle. The fund prospectus should illustrate what rights you may have in the event of a fund going bankrupt.
Take your Time and get it Right
There are several layers of diligence required to evaluate crowdfund opportunities. Taking your time, digging as deeply as you can, and enlisting the help of trusted associates or advisors are all important parts of mitigating risk and identifying the best possible investment opportunities for your retirement savings.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
