One of the advantages of having a Rocket Dollar account is the ability to invest in non-traditional assets such as venture capital, real estate, cryptocurrency, notes, peer-to-peer lending, and more.
However, one of the difficult things about investing in non-traditional assets is that every asset type has different criteria and procedures to make an investment successfully. It is essential to get these procedures right when investing with a retirement account.
In this article, we're going to take a look at investing in a venture fund as an individual through a Rocket Dollar account. We're going to talk about due diligence, filling out documents correctly, funding, the annual reporting, and what to do with funds once you receive a distribution from your investment.
For many folks investing in venture capital through a retirement account combines the potential of high growth of investing in early companies before they get large with the preferential tax treatment of retirement accounts. Having a portion of one's portfolio in high-risk, high-reward assets, combined with retirement account tax savings, could lead to significant upside potential. But as any high-risk, high-reward investment, folks must go in with their eyes open.
The first thing that an investor must do before participating in a fund is to complete due diligence. It is important to know what the fund is going to be investing in, who the people making the investments are, what their process for due diligence is when they are looking at companies in which they're going to invest, and what their expected timeline to return capital is. It is also essential to know how much you will be paying the fund managers to invest your money. While the 2 and 20 fee schedules are the most common, some funds charge more and some charge less.
Once you've decided that you want to invest in a fund and have done your due diligence (which is the same regardless of whether you're investing with cash or a retirement account), it is time to get into the specifics of investing using your Rocket Dollar account.
The most important thing is to title the investment in the name of your Rocket Dollar account, and not you personally. Once your subscription documents have been filled out, you are ready to fund. You’ll fill out the subscription documents for the IRA. Most funds that are set up to accept retirement funds have special subscription documents. Make sure you tell the partner you’re working with you’ll be using a retirement account, such as a self-directed IRA. If using a Checkbook IRA, the LLC will become the limited partner in the venture fund or a member of the special purpose vehicle/entity (SPV/SPE), assuming the SPV takes the form of a limited liability company.
Most venture funds make periodic capital calls from their investors. If you’re investing out of a retirement account, you’ll want to make sure there’s enough money in the retirement account to meet the future capital call requirements. It’s a good idea to check with the venture fund and make sure you know when the capital calls are coming so you can plan to have funds ready to wire.
You will then be provided with funding instructions that will include wire transfer instructions. This is where having a Rocket Dollar account makes the process simple, as you will be able to go through the instructions and send the funds yourself. In the case that you are using a custodial account, your custodian will send the funds from your IRA.
When investing in assets outside of stocks and bonds, it is important to keep in mind that there will typically be a different funding process depending on the asset type. With a conventional self-directed account, the complexity is increased because not only is the funding process specific to the investment, but there would need to be a third-party, the custodian, involved. Using a Rocket Dollar account removes the hassle of dealing with a third-party custodian, allowing you to invest quickly and safely while keeping all of the tax benefits of a retirement account.