How to Use Your Roth IRA to Start Investing in Women’s Health
A beginner-friendly, educational guide for individuals exploring early-stage investing in health and femtech using self directed Roth IRA
When I published our guide on “How to Start Angel Investing in Women’s Health with Just $1K,” I didn’t expect it to spark such a rich response. One of the most thoughtful came from Sherry Finkel Murphy, CFP® better known as Madrina Molly who reached out to say:
‘Did you know you can use a self-directed Roth IRA for this?’”
Sherry works with women of what she calls “a certain age(ncy)”- those ready to activate their wealth in meaningful, strategic ways. For many non-accredited investors in the U.S., using a Roth IRA may be one of the most powerful and underutilized ways to support startups without tying up short-term cash.
While I’m based in Switzerland, where different rules apply, I found her insight incredibly useful. The idea that you can use long-term retirement savings not just liquid capital to back the future of health is a game-changer.
This post is a companion to our original piece and takes things a step further. If you’ve ever felt that investing in femtech or health innovation was “out of reach,” read on. This might be the nudge and the tool you need.
As always, this post is for educational purposes only and is not a substitute for personal financial advice. Every situation is different. Please consult a licensed financial advisor before making any investment decisions.
— Maryann
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This is a companion piece to “How to Start Angel Investing in Women’s Health with Just $1K”. If you want to activate your wealth by putting your money where your values are, you’ve probably been researching the funds and educational offerings identified in that post. I bet you’ve even followed your nose to crowdfunding engines and venture funds.
You should know by now whether you are an accredited or non-accredited investor. This will determine which type of investments you may participate in. And your identified opportunity will clearly articulate which type of investor qualifies.
The next step is to make the investment. As a CFP® Professional, it’s my job to ensure that you match your goals and investments with the right instruments. And the right instrument for angel investing, unless you have oodles of liquidity (extra cash hanging around), is probably a Roth IRA.
Why a Roth IRA?
When you invest in a startup, whether it’s angel round (super early), seed round (very early), or venture rounds (early), you are investing in a company that isn’t listed on a trading exchange yet. That part comes after the Initial Public Offering (IPO) or sale to an existing exchange-listed company. As a result, you are making your investment in something illiquid; you can’t sell your stake and get your money back easily.
A Roth IRA is a long-term financial instrument that you don’t intend to touch for decades. Because of this, you won’t care that the money you’re investing is illiquid for up to 10 years.
There’s another good reason to use a Roth IRA for your angel investment: You intend to be wildly successful. If your investment bears fruit (and it will because women know a good idea when they see one) you don’t want to be stuck with a giant tax bill. If you use your cash on hand, you may have lots of capital gains when you exit your investment. If you use a traditional IRA, you may have a lot of income tax later. But, in a Roth IRA, you’ve paid all the tax you will ever pay on the amount you have contributed. Everything is tax-free forever after that, so long as you abide by the IRS rules of distribution. *
Alternative Asset Custodians
So let’s agree that a Roth IRA is the right tool. If you have an old 401(k) or 403(b) you might consider rolling some or all of it over into a traditional IRA and converting $1000 to Roth for this purpose. If you’re over 59.5 you can execute an in-service distribution (while still employed) to an IRA and do the conversion. If you’ve been contributing to a Roth IRA all along, that’s perfect just as it is.
Now that you have a Roth IRA, how do you use the money to apply it to an angel investment?
That requires understanding what an IRA account is under the covers: it’s a custodial trust (special savings account for your benefit) that is managed by a financial entity (custodian) who ensures that all tax laws are followed. If you’ve ever seen your statement, you know that the title of the account isn’t just your name, it’s a long-winded combination of the custodian’s name and yours with FBO between them. That’s literally the acronym for “For Benefit Of”.
You will need to find, and there are many, an Alternative Asset Custodian. Sometimes called a Self-Directed IRA Custodian, these IRS-approved trust companies specialize in holding non-traditional assets inside retirement accounts.
Some popular online Alternative Asset Custodians are:
Equity Trust Company
STRATA Trust Company
Inspira Financial
AltoIRA
Each of these platforms, like online banks, have different features and user-interfaces. All of them have fans and detractors. But they do a very good job of maintaining their clients’ alternative investments in good order.
Characteristics:
These accounts charge individual set-up and maintenance fees, for which you will keep a credit card on file. This is because they are not earning money from the investments themselves.
Most custodians require you to transfer cash into the account. That means you will need to sell any investments first. Some custodians (Equity Trust and Inspira are two) will also permit you to hold brokerage investments. So you can transfer those in-kind and sell them once they arrive on the custodial platform.
Some custodians have marketplaces wherein they have existing relationships with funds and crowdfunding sites.
The custodian is not responsible for the quality of your investment. All of the due diligence is up to you.
When you marry your investment to your custodial Roth IRA account, you will be marrying the account by its IRA trust name + Account Number and separate EIN that the custodian will supply. You are NOT participating in your own name and your own SSN.
Remember to ensure that both your account and investments have a beneficiary and contingent beneficiary identified.
Example:
Maybe you hear a female founder in women’s health speak at an event. She indicates, in her pitch, that she is raising funds on StartEngine. StartEngine will make it very easy to identify the opportunity category, the amount raised, and the type of investor who is permitted to participate.
You will create a profile in StartEngine that includes your Self-Directed Roth IRA as a funding source. You have the option of including this from any platform. But you’ll also see that StartEngine has a marketplace relationship with Equity Trust Company for easy connecting.
Once your funding source is connected, you are able to press the button to invest in your opportunity. StartEngine will take it from there.
Madrina Molly: Financial Wisdom for Women of a Certain Age(ncy) Membership
The above information and example constitute financial education and not financial advice. Your investments and financial plan are unique to you. If executing this is confusing, this is one of the things I do as a service for Madrina Molly members. I’m a Sherpa for setting up alternative asset accounts and making it easier for women to engage in angel and venture investing. I am a CFP® Professional for hire when you need information from a credentialed professional, whether or not you already have a financial advisory relationship. You can find out more at www.MadrinaMolly.com
*To avoid a penalty in a Roth IRA, the principal is available for distribution; earnings are available after age 59.5.
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Disclaimer & Disclosure
This content is for informational and educational purposes only. It does not constitute financial, investment, legal, or medical advice, or an offer to buy or sell any securities. Opinions expressed are those of the author and may not reflect the views of affiliated organisations. Readers should seek professional advice tailored to their individual circumstances before making investment decisions. Investing involves risk, including potential loss of principal. Past performance does not guarantee future results.
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