Tax professionals and lawyers are increasingly being asked about IRA capital in private raises. Here's what to know.
As more investors look to put retirement capital to work in private markets, founders and fund managers are fielding questions they may not have encountered before. And the professionals they turn to first, their tax advisors and lawyers, are increasingly being asked to weigh in on territory that sits outside traditional tax and legal guidance.
With the DOL proposing a new framework for 401(k) plans to include alternative assets, these questions are more relevant than ever. What feels like a tax and legal question may also involve a custodial layer requiring more nuanced answers. What follows is a breakdown of the questions you're likely to field and what's actually behind each one.
"If an investor is using IRA funds, does the subscription agreement and ownership documentation need to reflect the custodian instead of the investor directly?"
When an investor uses a self-directed IRA to participate in a private raise, the investment is made by the IRA, not the individual. That means subscription documents, wires and ownership records reflect the custodian (on behalf of the IRA) as the investing entity, not the investor personally. That said, KYC, investor questionnaires and accreditation verification can only be completed by the individual investor, requiring personal information and attestations that no one else can provide on their behalf. Founders and fund managers sometimes get confused when both names appear in different parts of the paperwork, but this is expected, and understanding why helps avoid unnecessary back-and-forth mid-raise.
"Can IRA investors participate in my raise the same way as everyone else, or does the deal structure need to account for them specifically?"
In most cases, no structural changes are required, but there are exceptions worth knowing. The main structuring consideration is entity type. IRAs can invest in LLCs, LPs, C-corps, and most private fund structures. S-corps are a notable exception, as IRAs are not eligible shareholders. If a fund or deal is structured as an S-corp, IRA participation isn't permissible. Your clients may need to know this before they've finalized their structure.
"When accepting IRA capital, how do I make sure I don't inadvertently trigger ERISA fiduciary obligations?"
The ERISA plan asset rule is central to how this works. When a fund accepts investment from "benefit plan investors," a category that includes IRAs above a certain threshold, the fund's underlying assets can be treated as plan assets. That designation triggers ERISA's fiduciary standards, subjecting the fund manager to obligations and restrictions that would not otherwise apply.
The threshold is 25%. If benefit plan investors collectively hold 25% or more of any class of equity interests in a fund, the plan asset rule applies. Fund managers need to monitor that percentage actively as their investor base grows.
The most practical way to manage against the rule is to qualify for an exemption. The most commonly relied upon for venture and private equity funds is the Venture Capital Operating Company (VCOC) exemption. A fund qualifies as a VCOC if it invests primarily in operating companies and holds the right to participate substantially in their management. If the fund meets VCOC criteria, the plan asset rule does not apply regardless of how much of the fund is held by benefit plan investors. A comparable exemption — the Real Estate Operating Company (REOC) exemption — exists for certain real estate funds.
The practical implication: accepting IRA capital is generally straightforward, but fund managers should confirm early whether their fund is structured to qualify for an exemption, or whether the 25% threshold needs to be tracked and managed over time. This is a conversation worth having with fund counsel before IRA capital becomes a meaningful share of the investor base.
"Is there anything about my deal structure that could create a tax problem for retirement investors, like UBTI?"
Unrelated Business Taxable Income (UBTI) is the most common tax complication that comes up in this context, and it's also the one that generates the most confusion. IRAs are generally tax-advantaged, but income generated through certain business activities, particularly investments in operating businesses structured as pass-throughs or deals that use leverage, can trigger UBTI, which the IRA may owe tax on. For founders and fund managers, the question is usually whether their structure creates UBTI exposure for IRA investors. This is a legitimate question for a tax professional, and one where the answer depends heavily on the specifics of the deal.
"How do I know if an investor's participation would trigger a prohibited transaction, and what's my exposure if it does?"
Issuers aren't entirely removed from the picture, and your clients are right to ask. Certain deal structures, particularly those involving investors who have a personal relationship with the issuing entity or its principals, can raise prohibited transaction questions that are worth surfacing early. This is covered in more depth in Part 3 of this series.
What issuers should understand about exposure: liability for prohibited transactions generally falls on the IRA owner, not the issuer. But the consequences are severe enough that the question matters regardless. If a transaction is later determined to be prohibited, the IRA loses its tax-advantaged status entirely for the year the transaction occurred. Founders and fund managers who unknowingly structure a deal in a way that triggers that outcome for an investor won't bear the tax liability directly, but the reputational and relationship consequences are real.
Where the line is
Tax professionals and lawyers can and should help clients understand deal structure, entity eligibility, UBTI exposure, and the general framework for how IRA capital flows into a private raise. What falls outside that scope is the custodial layer: which custodian to use, how IRA funds are processed and held, what the custodian's role is in flagging or preventing prohibited transactions, and how to operationalize IRA participation at scale.
That's where a self-directed IRA custodian comes in. When your clients are fielding IRA participation from investors, or want to actively encourage it, the custodian is the operational partner that makes it work. Alto is a technology-led self-directed IRA custodian built specifically for private market investing. When your clients need guidance on the mechanics beyond the tax and legal framework, Alto can step in.
Part 2 of this series covers what tax professionals and lawyers can safely advise on and how to refer clients when the question goes deeper.
