06.29.25 -- The popularity of Roth IRAs has exploded in recent years—and for good reason. Strategic Roth 401(k) contributions, timely conversions, and tax-free growth potential have made them more popular, with contributions surging and balances growing across all age groups.
Still, most investors assume Roth IRAs are just for ETFs or public stock positions. In reality, they offer far more flexibility—especially when paired with a self-directed custodian.
If you're already comfortable with private investments in your business life—whether that's real estate deals, private equity, or lending opportunities—you might be wondering: can I use my Roth for these investments too?
The short answer is yes, but there are important rules to navigate.
Why Business Owners Are Asking About Private Investments in Roths
You've built wealth through your business, you understand alternative investments, and you've likely accumulated a meaningful Roth balance through:
- Roth 401(k) contributions from your business
- Strategic Roth conversions during lower-income years or business transitions
- Years of traditional Roth IRA contributions that have grown substantially
Now you're looking at your Roth balance and thinking: "Instead of keeping this in ETFs and public equities, could I invest it the same way I manage my other capital—without triggering any tax landmines?"
What's Actually Allowed: The Self-Directed Roth IRA
Unlike most financial products, Roth IRAs are defined by what they prohibit—not by what they allow. That subtle distinction opens the door to a wide range of private investments. Permissible private investments include:
- Real estate (residential, commercial, raw land)
- Private equity and venture capital funds
- Private lending and promissory notes
- Precious metals and commodities
- Tax liens and deeds
- Private businesses (with significant restrictions)
- Cryptocurrency and digital assets
Important distinction: Brokerages like Schwab and Fidelity may offer access to select private or alternative funds—such as interval funds—but they don't support direct private investments. If you want your Roth to hold things like private company shares, real estate deeds, promissory notes, or an IRA-owned LLC, you'll need a self-directed custodian. These platforms offer more flexibility—but also more responsibility, including compliance oversight, transaction documentation, and UBIT reporting.
Some investors even establish IRA-owned LLCs for "checkbook control"—a structure that offers direct access to capital but introduces legal and tax complexity. It's worth noting that even unpaid work—so-called 'sweat equity'—can be considered a prohibited transaction if it benefits the Roth or the business it owns.—a structure that offers direct access to capital but introduces legal and tax complexity.
The Rules That Matter Most for Business Owners
This is where business owners need to be especially careful. The IRS prohibited transaction rules are designed to prevent self-dealing, and they're broader than most people realize. Prohibited Transactions to Avoid: You cannot use your Roth IRA to:
- Invest in your own business or a business you control
- Buy real estate you'll personally use (including vacation homes)
- Lend money to yourself, your spouse, or your children
- Provide services to investments held in your Roth
- Use your business expertise to "manage" Roth-held investments for compensation
The "Disqualified Person" Rule: This extends beyond just you. It includes your spouse, children, parents, and any business where you own 50% or more. One violation can disqualify your entire Roth IRA.
Example: Your Roth buys a rental property, then you hire your son's landscaping company to maintain it. That seemingly harmless decision creates a prohibited transaction that could disqualify your entire Roth.
Private Investment Categories That Work Well
Real Estate Investments Your Roth can purchase rental properties, commercial real estate, or participate in real estate partnerships. All rental income and eventual sale proceeds flow back to the Roth tax-free. You'll need to remain completely passive—no management, no personal use, and no financial benefit beyond what flows back into the Roth.
Private Equity and VC Funds Many private funds accept IRA investments, though they often have higher minimums for retirement accounts. The tax-free growth potential on successful exits can be substantial.
Private Lending Your Roth can act as a private lender, earning interest on promissory notes. This can be particularly attractive in today's interest rate environment.
Alternative Investment Funds REITs, commodity funds, and other alternative investments that aren't available through traditional IRAs may be accessible through self-directed custodians.
The Hidden Complexities
Administrative Burden Self-directed Roth IRAs come with greater autonomy—and greater responsibility. Investors are expected to:
- Research and vet investments independently
- Handle all transaction documentation
- Ensure compliance with prohibited transaction rules
- Manage ongoing reporting requirements
Cost Considerations
- Custodian fees: Typically $300-500+ annually, plus transaction fees
- Investment minimums: Often higher for retirement account investors
- Due diligence costs: Professional review of private investment documents ($2,000-$5,000 typical)
UBIT (Unrelated Business Income Tax)
If your Roth IRA invests in an active business or uses leverage (e.g., leveraged real estate), it may owe taxes on unrelated business income. This doesn't disqualify the Roth, but it does create a tax bill within the account—and requires filing IRS Form 990-T.
Example: Your Roth purchases a $500K property using $300K in financing. Because 60% of the purchase was financed, 60% of the income and gains could be taxed—even inside your Roth.
Is This Right for Your Situation?
Self-directed Roth IRAs aren't for everyone, even among sophisticated investors. Consider this approach if:
- You have substantial Roth balances (typically $100,000+)
- You're comfortable with the administrative complexity
- You have experience evaluating private investments
- You understand the prohibited transaction rules
- You have other retirement savings as a foundation
Red flags that suggest waiting:
- Your Roth balance is your only retirement savings
- You're looking for ways to invest in your own business
- You want someone else to manage the complexity
- You're not comfortable with illiquid investments
Making the Decision
You already know how to evaluate private investments and generate returns outside public markets. A self-directed Roth lets you apply that expertise to build tax-free wealth.
The trade-off? More compliance, more paperwork, and real consequences if you violate the rules. But if you've built wealth through private investments, this can be a natural next step.
Next Steps
- If you're considering private investments in your Roth IRA:
- Evaluate your current retirement savings foundation
- Research qualified self-directed IRA custodians
- Understand the specific rules for investments you're considering
- Factor in all costs and administrative requirements
- Consider working with advisors experienced in self-directed accounts
Disclaimer: This content is for educational purposes only and does not constitute legal, tax, or investment advice. Rules regarding self-directed IRAs are complex and subject to change. Always consult with a qualified tax advisor, legal counsel, or fiduciary financial planner before implementing any strategy.