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In 1999, Peter Thiel used a Roth Individual Retirement Account (IRA) holding a little less than $2,000 to buy 1.7 million shares of a startup called at a tenth of a penny per share.

By 2002, eBay acquired PayPal, and Thiel's Roth was worth $28.5 million. He reinvested $500,000 of that into a little-known company called Facebook. By 2019, according to ProPublica's reporting, his Roth IRA was worth over $5 billion.

Every dollar of it – tax-free.

Thiel's story is extreme. You're not going to turn $2000 into $5 billion. But the mechanism he used – a Self-Directed IRA (SDIRA) that holds private company investments – is available to any accredited investor. And it's one of the most underutilized tools for building tax-advantaged wealth outside the stock market.

It’s magic and, today, I want to show you exactly how it works and why it's particularly powerful for investing in cash-flowing small businesses.

Disclaimer: Consult a qualified CPA or financial advisor before acting on any of the educational content in this newsletter.

A self-directed IRA (SDIRA) is not a different kind of account. It follows the same IRS rules as any traditional or Roth IRA – same contribution limits, same tax treatment, same withdrawal rules. The only difference is who manages it – i.e. the custodian.

Standard brokerage custodians – Fidelity, Schwab, Vanguard – restrict you to publicly traded stocks, bonds, and mutual funds. A self-directed custodian allows you to invest in nearly any asset the IRS permits: real estate, private equity, private company stock, promissory notes, limited partnerships, and more.

So why don't more people know about this? Because brokerage firms make money selling stocks and mutual funds. Private investments don't generate trading commissions or management fees for them. The limitation comes from the platform – not from the IRS. The IRS's actual prohibited list is remarkably short: collectibles, life insurance, and S-corp stock. That's essentially it. 

The brokerage platforms that restrict you to public markets aren't following IRS rules. They're following their own business model.

Setting up an SDIRA is straightforward: open an account with a self-directed custodian (companies like Directed IRA, Madison Trust, or Equity Trust), fund it via contribution or rollover from an old 401(k), then direct the custodian to execute your investment. 

It's more paperwork than buying a stock, but it isn’t more complicated.

$18.9 trillion. That's how much sits in US IRA accounts as of Q3 2025 – nearly all of it invested in public markets. For context, the entire US private equity industry manages roughly $3.1 trillion in assets as of late 2024. The capital available for private market diversification dwarfs the infrastructure currently built to absorb it. That gap is an opportunity for investors who know where to look.

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Here's the insight that makes this worth your attention.

Private company investments – and small business acquisitions specifically – generate returns through two channels: ongoing cash distributions and long-term equity appreciation. In a taxable account, those distributions get taxed every year. The exit gets taxed at capital gains rates. The IRS takes a cut at every stage.

Inside a Roth SDIRA, none of that happens. You pay taxes only on the money going in. Everything that grows inside – distributions, appreciation, compounding – comes out tax-free after age 59½.

Think of it this way: Pay taxes on the seed. Never pay taxes on the harvest.

A simple example: you invest $50,000 from your Roth SDIRA into a private business. Over ten years, it generates cash distributions and grows to $150,000. In a taxable account, you owe taxes on the distributions each year and capital gains on the $100,000 appreciation at exit. In the Roth SDIRA, you keep all $150,000. No further tax due.

That differential compounds dramatically over time. Even a modest tax drag of ~25% on annual returns significantly erodes long-term wealth. Eliminating it entirely is one of the single most powerful levers available to investors – and almost nobody outside of sophisticated family offices uses it deliberately.

A 2021 Joint Committee on Taxation analysis found over 28,000 taxpayers with aggregate IRA balances exceeding $5 million as of the 2019 tax year – up from roughly 8,000 a decade earlier. Of those, 497 held an average of $150 million each. The common thread: private market investments compounding inside a tax-free wrapper. 

That means Thiel is the extreme… but not the anomaly.

Not every private investment is equally suited to an SDIRA. Venture capital, for instance, follows a power law: most investments go to zero, and you're waiting a decade for the one that doesn't.

Small and Medium-sized Business (SMB) acquisitions are different. At the valuations we target – 3-5x Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) – these are profitable, cash-flowing businesses from Day One. That means the SDIRA isn't just appreciating on paper. It's receiving real cash distributions that compound inside the tax-advantaged wrapper year after year.

The return profile is also ideal. SMB acquisitions at these multiples typically generate ~15-20% unlevered cash yields with ~80% EBITDA-to-Free Cash Flow (FCF) conversion. Consistent, cash-generative returns are exactly what you want sheltered from taxes, because the compounding effect of tax-free distributions over a 10-20 year horizon is where real wealth creation happens.

One practical point worth raising: many high-earning professionals have old 401(k)s from previous employers sitting in target-date funds on autopilot. Rolling those into a self-directed IRA and redeploying into private SMB investments is one of the most straightforward ways to meaningfully improve long-term after-tax outcomes. The money is already there; it's just not working as hard as it could be.

At Lynnfield, we acquire cash-flowing businesses in the $500K–$5M EBITDA range and offer co-investment opportunities to qualified investors. For accredited investors exploring how to deploy IRA capital into private SMB acquisitions, this is exactly the asset class that this structure is built for. Join our investor list to receive deal flow as we evaluate new acquisitions. 

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Two rules matter most. First, prohibited transaction rules are strict: you cannot invest your SDIRA into a company you own, operate, or that benefits you or your immediate family. The investment must be entirely at arm's length. Violations can disqualify the entire IRA and trigger immediate taxation plus penalties.

Second, if your SDIRA invests in a pass-through entity – an LLC or limited partnership – that generates operating business income, it may trigger Unrelated Business Taxable Income (UBTI). Investing through a fund that uses a blocker entity can mitigate this. It's an area where structure matters, and your CPA should weigh in.

Thanks for reading!

Peter Thiel's story isn't really about PayPal. It's about understanding that the structure you use to hold an investment can matter as much as the investment itself. The Roth SDIRA didn't make his returns extraordinary – it made sure he kept them.

For investors who want exposure to cash-flowing small businesses, that same structure is available, legal, and largely ignored by most of the market. That's usually where the interesting opportunities sit. 

Reply to this mail if you’d like to explore these opportunities with Lynnfield and I’ll walk you through the structure.

Talk soon,
Param

P.S: In case you’re joining us late, check out the previous editions of this newsletter.