One of the most frequently asked questions (FAQs) we get here at the Tweener Fund is "Can I invest in the Tweener Fund using a 401k or an IRA retirement vehicle?" The answer is yes. At the time of this writing (Early Nov 2023) we have ~150 investors (LPs) and about 30 of them use this mechanism. While this post is in no way an attempt to provide financial advice, it is a 'how to set it up', what our LPs tell us is they choose this mechanism so their returns can grow tax-free until retirement.
One of our LPs, Jordan Weinstein, raised his hand and volunteered to share his experience setting this up in his account. I'll say it one more time, this is not fiancial advice and also the rules change frequently as does the AngelLIst user-interface. We'll do our best to keep these steps updated, but if they don't work, your next best step is to reach out to the LP support team at AngelList.
Ok, I'll now turn it over to Jordan - I'm going to thank Jordan at the top here so you don't miss it at the bottom - thanks Jordan, we really appreciate you doing this for our current and future LPS
-Scot
-----------------Jordan Weinstein post follows------------------
A Self-Directed RothIRA is an interesting option for investing in the TweenerFund. I chose to go down this path after doing a lot of research on both how to do it, as well as the advantages and disadvantages of this approach. I am not an expert, this is not financial advice, and you should seek your own financial advice before making any investment decisions. I am simply sharing my own experience in case others may find it helpful.
TL;DR: The process of setting up a SDRIRA is somewhat tedious - but the upside is that your returns from the Tweener Fund could grow tax-free. The downside is that you’ll have to pay fees, and you won’t be able to access the returns until 59.5 years of age (without paying penalties). Make sure that you’re not paying fees out of tax-advantaged funds, and assess whether the cost of the fees is worth the potential tax savings. For some custodians (though not all), fees are fixed - not a % of assets. So this strategy makes more sense for those investing more money. If you’re just investing the minimum, consider the tradeoffs carefully.
What is a Self-Directed RothIRA (SDRIRA)?
Here’s a good explanation. And here’s another.
For the purposes of this discussion the important features are that SDRIRAs 1) can be invested in “alternative assets” (like the TweenerFund); and 2) that withdrawals are tax-free. There is a catch though… as with any IRA, you can’t make withdrawals (without a financial penalty or taxes on the earnings) until age 59.5.
Another important factor is that RothIRAs have annual contribution limits as well as limits that restrict whether you can contribute at all if you exceed adjusted gross income limits of $129K (single) or $204K (married filing jointly) - as of 2023. Given those restrictions, it’s likely that you would want to use a previously-funded RothIRA account that you can transfer over into a SDRIRA.
Another option for funding is referred to as a “Backdoor RothIRA”, which you can learn about here.
Is this a good option for you?
Let’s consider why you may or may not want to take this approach:
Advantages:
As with any Roth IRA investment, principal is invested post-tax, and any gains are tax-free. So hopefully the Tweener Fund delivers strong returns, and you will owe no taxes on those gains. Peter Theil famously used his RothIRA to invest in the early days of Facebook - and as of 2021 it was reportedly worth $5B… on which he’d owe no taxes.
Also - and for some this might be the most significant factor - if you already have funds in a RothIRA, this approach provides a way for you to invest without having to liquidate other assets or use cash.
Lastly, should things go well with your Tweener Fund investment and you find yourself with significant returns, you would have the option of keeping those funds in the SDRIRA and re-investing them in other assets (such as real estate, for example). These assets could then continue to grow, tax-free.
Disadvantages / risks:
Tweener Fund is a risky investment. You could lose a significant part of the investment and, depending on your income and tax situation, you might not be able to replenish those funds in a Roth IRA. Be sure to fully consider how the Tweener Fund investment fits into your overall investment portfolio and whether using tax advantaged funds for a relatively risky asset class is a reasonable risk to take.
In order to get the benefits of this approach, you can’t withdraw these funds until age 59.5 (without a penalty). So if you go down this path you need to consider this a long-term / retirement investment.
Fees. All SDRIRA custodial accounts come with direct fees. Here’s the fee schedule for ForgeTrust (the SDRIRA custodian that I went with). You’ll pay these fees regardless of the performance of your investment - so make sure that the trade off is worth it. This likely depends on how much you’re investing, and what you consider to be the likely time horizon of the Tweener Fund investments that you are making.
You need to make sure to calculate all of the fees, and arrange to pay fees via wire or credit card - NOT with tax advantaged funds. This is something that I didn't realize until I had already paid several hundred dollars in fees out of money that was already in my RothIRA. Ask about this in advance.
In addition to transactional fees when you move money in or when you allocate funds for investment, most (if not all) of the custodians will also charge you a quarterly fee just for maintaining the funds in the account. You will have to pay this fee for as long as your funds are in the self-directed account. If funds are liquidated (because a company exits, for example) - then you could potentially move them out of the self-directed account and back into a "normal" RothIRA ... and then you would no longer need to pay fees on those funds. But it will likely be a long time (10 years?) before all of the investments mature and are either liquid (if the companies exit) or gone (if the companies fail). Do the math on how much you'll be paying in quarterly fees relative to your investment and your potential tax savings and make sure that it makes financial sense.
Example scenarios
Let’s consider that over a 10 year time-horizon. If you’re only actively investing for 2 years, you’ll end up paying about $4K in fees over that 10 year timeframe. If you were actively investing for all 10 years then you’d pay about $7K in fees. To keep things simple let’s assume a 15% capital gains tax rate. At $4K in fees you break even after $27,467 of gains. At $7K in fees you break even after $46,667 in gains. At any return level lower than these amounts you’ve lost money by using a SDRIRA - and at any return level above these amounts you’ve saved money by allowing your gains to grow tax-free.
In this example, note that none of these fees are a percentage of assets invested. That means that this strategy may be a no-brainer at higher levels of investment - where the upside could be hundreds of thousands, or even millions of dollars - but potentially a questionable one at lower levels of investment, where the chances that tax savings on gains exceed fees is lower. There are however some custodians that do charge a % of assets so make sure to carefully check this before choosing one.
So you want to move forward? Here’s what you need to do:
- The first thing you'll need to do is create a RothIRA custodian account which will become the investment vehicle for TweenerFund. Instead of investing directly, you're directing this custodian account to invest. Here's the list of custodians that AngelList supports. If you’re already started investing directly with TweenerFund and you want to move over to a SDRIRA, you’ll need to end your direct subscription with Tweener / AngelList and start a new one via the custodian account. Think of that account as an entity that invests on your behalf.
- In my research and in consultation with my financial advisor it looked like ForgeTrust and Equity Trust had the lowest fees. I ended up going with ForgeTrust - but certainly do your own research here.
- The process of getting the account setup, and moving the money from my prior IRA custodian to ForgeTrust took much longer than expected - about 6 weeks. If by chance your current IRA custodian is supported by AngleList that would make the process far easier.
- Despite the process taking longer than expected both AngelList and ForgeTrust were very responsive / helpful. One challenge was that ForgeTrust required that everything be done with cumbersome, difficult to manage PDFs. Alto looked like it might have a more modern process / UI that would make the setup easier - but I don’t have any personal experience with it.
Hope that’s helpful!