Can You Put a Hedge Fund in an IRA?

With or without hedge fund investments, an IRA offers a way to save.

With or without hedge fund investments, an IRA offers a way to save.

An individual retirement account -- or "arrangement," as the IRS calls it -- offers one of the smartest ways to save for the post-employment years. In a traditional IRA, your contributions are tax-deductible, but withdrawals are taxed. In a Roth IRA, it's the other way around: contributions come from taxed income, and withdrawals are tax-free. Either way, you get a tax break on retirement savings and have wide latitude as to where the money can go.

Hedge Funds

A hedge fund is an unregulated investment pool. The fund manager makes the trading decisions and is free to focus the fund on a particular sector or investment model. Hedge funds require a large investment of capital, and many accept only wealthy clients. A common feature of hedge funds is high risk; many leverage their trades with borrowed money and speculate on options, futures and other derivative investments.

IRAs

The Internal Revenue Service regulates IRAs under the federal tax code. Chartered financial companies and private money managers serve as IRA custodians, while investors are subject to federal rules on deductibility of contributions, penalties for early withdrawal, restrictions on investments and so on. In a self-directed IRA, the account owner can decide where his savings goes and how much risk he's willing to take. An IRA may contain stocks, bonds, mutual funds and other investments, including hedge funds. A hedge fund manager has the right to accept or refuse an investment of IRA money.

Investments and Rollovers

Hedge funds don't offer IRA accounts on their own, and the owner of an IRA cannot make investments into hedge funds directly. That transaction must be handled by the IRA custodian on the instructions of the account holder. If the custodian does not participate in hedge funds, the IRA owner must transfer the account to another custodian who does. IRS rules allow you to roll IRA money into a different account tax-free within a period of 60 days. If the transaction is not completed in that span, the money is subject to tax -- as well as early withdrawal penalties if you're under the age of 59 1/2.

Prohibited Transactions

IRA holders who want to invest in a hedge fund must meet the fund's investment minimum and abide by the rules for deposits and withdrawals. The IRS prohibits certain transactions with IRA savings, including transactions with "disqualified persons." These include the IRA manager himself as well as family members or business partners of the IRA owner. IRAs may not invest directly or indirectly in the shares of "S" corporations, and they may not deal in metals, stamps, some coins, works of art and antiques. There are also complex rules limiting the percentage of any company that an IRA can own.

 

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