Self Directed Pensions

As mentioned in an earlier Blog I have my checking account at a brokerage firm. This gives me access to any publicly traded stock, bonds, etc. But what about privately owned companies? The management of private companies can do as they please with regard to financing. Public stock is traded under the rules of the SEC with strict controls. Is that good? In a way yes, but in protecting the investor with information, it exposes the investor to other risks. For example a sudden drop in the price of the stock when negative news is announced, or a sudden rise when an acquisition is announced. 

So what about private placements? There is some regulation, based on the State of incorporation, but in practice it is down to the investor to do their own due diligence. Sounds risky! It is, but this type of investment provides the biggest return.

What about capital gains/losses? This is the key question. If I invest personally and a company fails, I can write of the loss against other capital gains. If I have no other capital gains then I only get to write of $3,000 in that year. If I invest personally and I make a profit, it is either taxed at short or long term capital gains. Short term is taxed at the rates of ordinary income, long term is currently 15%. Don’t forget State taxes if you have them. 

So what happens if you invest in a private placement using your IRA or 401k? These entities are not taxed so for practical purposes these capital losses are gone forever. (Not quite true in all cases, so you should keep track of losses.) But what happens to capital gains. They are yours to keep. Imagine if you had invested in Google before they were public, that stock could now be sold tax free. (Remember the rules of self dealing. You cannot work for the company in which you invest. Even offering phone consulting is considered self dealing. Some ERISA attorneys even warn against attending the shareholder’s meeting of private companies. Though the law allows, and encourages, the management of the assets so it is permitted to keep a close watch on the private investment. )