Investing in Crowd Funds with a Self-Directed IRA
During the last few years, investing in crowdfunding opportunities has become a popular way for self-directed IRA and Solo 401(k) holders to put money to work. The concept of crowdfunding – or raising capital for a venture by securing small amounts of capital from a large number of investors – has been around for a long time. With the passage of the JOBS act in 2011, and final SEC rules effective in early 2016, it became much easier for businesses to solicit such investments from the public. There are now hundreds of platforms offering such investments.
Crowdfunding ventures come in many varieties; from capitalizing startups to peer-to-peer lending to real estate development projects.
There are many advantages to this kind of investing that make it appealing, including:
- Ability to invest with small amounts of capital
- Potential for consistent, solid returns
- Easy to manage
- Risk mitigation through diversification
- Leveraging the expertise of professionals
If you are thinking about investing your self-directed IRA or Solo 401(k) into some form of crowdfunding, there are a handful of things you need to know to ensure a compliant, tax-favorable project.
What Types of Funds are Suitable?
There are 3 basic types of crowdfunding: donation, reward and equity.
In a donation fund, a venture typically seeks small amounts of capital with no promise of return to the investor. This type of fund is not suitable for an IRA investor.
Reward funds typically promise investors a copy of the product the venture will produce, or some form of coupon/discount and early access to the product. Since your IRA does not have a need for a cooler with a built-in stereo and blender, or some other tangible item, this type of crowdfund is also not a good fit for retirement plan investors.
With equity based funds, investors are provided with a share of ownership in the funded venture. This is really the only type of fund that makes sense for IRA investors.
Are You Eligible to Invest?
While the securities associated rules have been relaxed in recent years, there are still limitations on the types of ventures that may seek crowd funding, where they can operate, and the types of investors they can accept.
There are also limitations on the amount of capital an individual can invest based on their income and net worth. An individual with annual income or net worth less than $100,000 may only invest up to the greater of $2,000 or 5% of the lesser of their annual income or net worth. Investors with net worth or annual income of more than $100,000 may invest up to 10% of the lesser of their annual income or net worth.
Because of these lower dollar thresholds, many crowd funds are only available to accredited investors with annual income over $200,000 ($300,000 if married) or with a net worth in excess of $1,000,000. If you are not an accredited investor, then one of the first things you will want to learn about a potential fund is whether it is open to non-accredited investors. Your IRA or Solo 401(k) inherits your personal limits when it comes to these thresholds.
Is There Exposure to UBIT Tax?
For IRA and 401(k) investors, ensuring that a planned investment will be fully tax sheltered is a key part of researching any potential crowd fund. Depending on how a fund is structured and what kind of income is produced, your self-directed plan could have exposure to Unrelated Business Income Tax. This tax exposure exists when a tax-exempt entity receives trade or business income.
Determining whether there may be UBIT implications can be complicated as there are many variables. If a funded venture is a C-Corporation and investors own shares and received dividends, this is passive income not subject to taxation. If a funded venture is a pass-through entity such as a LLP or LLC, and the income it produces is from providing a product or service, then an IRA investor could have exposure to UBIT on the operating income received from such a fund. However, any gain in value of the IRA’s shares in the venture would not be taxed. So, for a true venture capital play where the prize is not the income earned during start-up but rather the potential gain in share valve if the venture succeeds, then such an investment can make sense – even if there is some minimal exposure to UBIT. If the operating income produced by the venture is the real value of the investment, then UBIT can spoil the party for self-directed IRA investors.
The nature of the income produced by the venture also has an impact on whether the gains may be taxable to an IRA investor. If the venture is producing passive income such as interest from lending or rent from real property, then the share of income received by the IRA or 401(k) would not be subject to UBIT. UBIT only applies to trade or business income such as providing a product or service. In the real estate space, developing property for sale or rehabbing and promptly reselling properties are considered trade or business income. As such, when looking at real estate crowd funding, those that are providing loans to real estate developers, or that are holding properties long term for rental income and potential appreciation are generally going to be the best fit.
Is There Exposure to UDFI Tax?
Unrelated Debt-Financed Income is another form of taxable income in the IRA world. If an investment is using debt in addition to investor capital, then the percentage of income an IRA investor receives that can be attributed to that debt is taxable. So, if a fund is using investor capital for 25% of its capital and obtaining a loan for 75%, then 75% of the income an IRA receives (reduced by 75% of any applicable deductions) would be subject to UDFI taxation. A Solo 401(k) is exempted from UDFI taxation when the debt is used for the purchase of real property, but other forms of debt will create UDFI exposure for such plans.
When it comes to tax exposure, you should ask these questions of the fund sponsor. In our opinion, if they cannot give you a clear, precise answer on the topic, then they are likely not sophisticated enough to merit your investment. Of course, you should never simply trust the word of an investment provider, and should always consult with your licensed tax advisor to ensure an investment will be tax-favorable for your self-directed plan.
Be Informed for Success
As with any investment you might make with your self-directed IRA, knowing the right questions to ask is the first step towards success. The crowdfunding space is no different than direct investments in real estate, venture capital, or private lending in this regard. Be sure to perform thorough diligence of any investment you are considering and consult with your team of experts for guidance when it comes to matters of IRS compliance. If you operate from a place of knowledge, you can choose the investments that are best suited to your investment goals and potentially see solid growth in your self-directed IRA or 401(k) as a result.
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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.
