Crowdfunds
Crowdfunding Investments
Investing in crowdfunding opportunities is a popular way for self-directed IRA and Solo 401(k) holders to diversify. The concept of crowdfunding has been around for a long time and is essentially raising capital for a venture by securing small amounts of capital from a large number of investors. With the passage of the JOBS act in 2011, and final SEC rules effective in early 2016, it became much simpler for businesses to pursue such a funding strategy. The rules enable businesses to solicit such investments from the public without the full level of regulatory requirements associated with a public stock offering or other forms of securities. There are now hundreds of crowdfunding platforms offering such investments
Kinds of Crowdfunds
First things first, of course. IRS Notice Crowdfunding opportunities abound in wide variety. There are online platforms specifically tailored to offer one or more fund opportunities associated with new product development, real estate, motion picture production and more. There are also standalone ventures that go directly to investors rather than through a platform.
There are 3 basic types of categories of funds, only one of which is beneficial for an investor using retirement funds.
- Donation funds generally seek small amounts of capital with no promise of return to the investor. These feel-good opportunities are not appropriate for an IRA or 401(k).
- Reward funds attract investors by offering early access to the resulting product of the venture. This is also an unsuitable type of investment for an IRA, as you could not personally use the resulting product and the IRA probably does not have a need for some new invention.
- Equity based funds are appropriate for retirement investing, and offer a ownership stake in the funded venture.
2014-21 determined that digital currencies are treated as personal property. An IRA is allowed to hold such assets.
.jpg)
Is Leverage used?
When you utilize a self-directed IRA to invest in cryptocurrency, all gains are tax-sheltered under the umbrella of the IRA. Investment income will have the same tax-deferred status of a traditional IRA/401(k). If you are using a Roth account, all investment gains and future distributions
Some funds may use investor capital as well as some form of debt-financing. This may create exposure to taxation on Unrelated Debt-Financed Income (UDFI). Basically, when a tax-exempt entity like an IRA or 401(k) plan is using borrowed – non-plan – capital as a lever to accelerate growth, this tax applies to the percentage of the gains the plan receives from the borrowed funds.So, if an investment is 60% debt-financed, 60% of the income the IRA or 401(k) receives is considered taxable. 60% of any applicable deductions would then be used to reduce the taxable income amount.
IRA plans are subject to UDFI taxation in all debt-financing scenarios. Solo 401(k) plans are exempted from UDFI taxation when the debt instrument is used for the acquisition of real property. Other forms of debt-financing would expose a 401(k) plan to UDFI taxation.If there will be UDFI exposure you should review the investment with your licensed tax advisor to gauge the impact. In some cases, the after-tax return on investment may still be quite worthwhile. will be tax free.
Will UBIT Apply?
If the underlying income producing activities of a venture are considered a trade or business, then an IRA or Solo 401(k) could have exposure to Unrelated Business Income Tax. Determining whether UBIT applies can be complicated as there are many variables. If a venture is a C-Corporation and investors own shares and received dividends, this is passive income not subject to taxation. If a funded entity is a pass-through such as a LLP or LLC, and produces income from providing a product or service, then an IRA investor could have exposure to UBIT on the operating income received.
Funds Typically Not Subject to UBIT
- Entities formed as subchapter C corporations where investors are shareholders. Corporate dividends are passive income to a retirement plan.
- Entities holding property to produce rental income.
- Entities that produce revenue through interest, dividend, or royalty arrangements, such as funds for investing in mortgages, commercial debt, etc.
Funds Typically Subject To UBIT
- Real Estate funds engaging in new construction or rehab of properties for immediate sale.
- Direct equity in a business that offers a product or service, if the business is not a C Corporation and therefore passes-though its earnings to stakeholders.
- Funds engaging in some form of dealer activity – buying and reselling.
The Appeal of Crowdfunds
There are several advantages of investing in crowdfunds, including:
- One can typically participate with limited capital
- It is easy to diversify by investing in multiple funds
- Easy to manage
- Potentially good return on investment
- Leveraging the expertise of experts in a field
Before investing in a crowdfunded venture with your self-directed IRA plan, you will want to consider the following questions.
Is Accreditation Required?
Some funds are open only to accredited investors. Your self-directed retirement plan is viewed as accredited if you personally meet the annual income or net worth requirements associated with accredited status. If you are not accredited, your plan will not be able to participate.
In Summary
Investing in crowdfunds can be a very hand’s off way to step into solid deals and leverage the expertise of professionals in a field. If you have an opportunity for such investments and want to discuss whether the use of IRA or 401(k) funds may be appropriate, please feel free to contact us.
Diverse Investment Choices
Flexible Investment Strategies
Tax Advantages
.png)
Expert Guidance
.png)
What our clients says about us
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.
