Angel Investing Through an IRA: What Investors Need to Know

At Groove we work with 250 early-stage investors, including both Limited Partners in our funds and individual angel investors. A question that comes up on the regular is investing in startups through a Self-Directed IRA. The TL;DL is that it’s possible—but might not be for everyone. So, let’s get into it.

What is a Traditional IRA?

First let’s revisit some basics, an IRA is simply a retirement account that has tax advantages. Within that retirement account you can invest in assets like stocks, bonds, or mutual funds. The catch is most traditional IRAs limit the investments you can make to those that are publicly traded (think the stock market).

There is a subcategory of IRAs called Self-Directed IRAs. Both Traditional IRAs and Self-Directed IRAs are the same in the fact they are tax-advantaged retirement accounts. And both share contribution limits and general IRS rules.

How do Self-Directed IRAs Differ?

The primary difference is a Self-Directed IRA (SDIRA) gives the account owner control to invest in a wider range of alternative investments, such as real estate, private equity, startups, and more. The account owner “directs” all the investment decisions through a custodian or broker.

Pairing Self-Directed IRAs with Early-Stage Investing

Angel investing within an SDIRA can be a good fit for a few reasons: long investment time horizons align well with retirement accounts; illiquidity is expected (and acceptable) in retirement accounts; and early-stage investing as a diversified asset beyond public markets.
Early-stage investing has the potential for high returns. And while there are a variety of ways investors can minimize their tax obligations, investing through a Self-Directed IRA can offer particularly powerful advantages if an investment is successful. Similar to a Traditional IRA, the investment growth is tax-deferred, meaning the earnings and gains aren’t taxed while they occur. An angel investment made within an SDIRA could produce returns, all of which could be reinvested within the SDIRA, without paying capital gains taxes at the time of the transactions. Taxes are generally owed only when funds are ultimately withdrawn from the SDIRA.

“There are also Self-Directed Roth IRAs. They come with a lot of similar characteristics as regular Self-Directed IRAs but with one significant difference: The earnings can be taken out completely tax-free, if you let them accumulate within the Roth SDIRA until age 59.5. This can be especially attractive for high-return investments, essentially eliminating the tax burden on the gain forever!” 

Landen Berning 
Senior Tax Manager
CBIZ Advisors, LLC

Understand The Rules

Before using an SDIRA to make an angel investment, it’s critical to understand that the IRS rules are strict and the consequences for getting them wrong can be severe.

One of the most important concepts to understand is “prohibited transactions”. Your SDIRA cannot invest in a company that you personally control, nor can you receive any form of compensation or personal benefit from the investment. That means no salaries, consulting fees, guarantees, or “side deals.” Even well-intentioned actions can cross the line if they personally benefit you outside the IRA.

Closely related is the idea of “disqualified persons”, which includes you, your spouse, parents, grandparents, children, and entities you control. In general, your SDIRA cannot invest in companies owned or controlled by these individuals. For angels who are active founders, operators, or board members, this is where extra caution is required.

Why does this matter so much? Because if the SDIRA account owner engages in a prohibited transaction, the IRS can treat the entire IRA as having lost its tax-advantaged status, potentially triggering income taxes and, in some cases, early-distribution penalties. Importantly, the consequences apply to the entire account, not just the specific investment involved.

The takeaway: SDIRAs are powerful, but they are not forgiving. If you’re unsure whether something is allowed, stop and ask before proceeding.

How the Mechanics Actually Work

One of the most common misconceptions about SDIRAs is that they function like personal checking accounts. They don’t.

When you invest through an SDIRA, your account must be administered by a custodian—a specialized firm that handles recordkeeping, compliance, and reporting. The custodian does not evaluate the quality of the investment, but they do ensure the transaction follows IRS rules. Stated differently, custodians aren’t allowed to give financial advice. You will need to do your own homework on the investments you direct the custodian to make.

Importantly, the investment is made by the IRA itself, not you as an individual. This affects how documents are signed, how checks or wires are issued, and how ownership is recorded. Everything—from subscription agreements to cap tables—must reflect the IRA as the investor.

Timing also matters. SDIRA investments often take longer to execute than investing directly as an individual due to additional paperwork, review processes, and funding logistics. And not every custodian works at the same speed. Some can be more laborious to work with, which can be a challenge in fast-moving financing rounds. Advance planning and a quality custodian partner is key.

Key steps to setting up an SDIRA include:

1. Research & Select a Custodian: find a custodian specializing in SDIRAs that aligns with your personal investing goals and has clear fee structures.
2. Open the Account: complete the custodian's application, providing personal info and paying any setup fees.
3. Fund Your SDIRA: transfer funds from an existing retirement account (401(k), IRA) or make a new contribution, adhering to IRS limits, into the new SDIRA account.
4. Invest Your Funds: instruct the custodian to send funds to your selected startup, following all IRS rules. 

Costs, Tradeoffs, and Realistic Expectations

Using an SDIRA for angel investing isn’t free, and it isn’t always optimal.

Most custodians charge setup fees, annual account fees, and transaction-based fees. Depending on your check size and investing frequency, these costs can meaningfully impact returns, especially for smaller investments.

There’s also a loss of flexibility compared to investing personally. You can’t move as quickly or restructure investments as easily.

Because of these tradeoffs, SDIRAs are often best suited for:

• Larger, long-term bets
• Investors with patience and process discipline
• Angels who already understand early-stage risk