How To Successfully Split Assets Between Traditional and Self-Directed IRAs, 401k, and DB Plans
In the vast world of retirement planning, one of the biggest hurdles people have to overcome is the overwhelming number of choices. In some ways, it almost seems like the finance industry manufactures a great degree of that complexity to keep its relevance.
Unfortunately, when it comes to diversification of a traditional portfolio, this complexity and lack of confidence can translate, not only from the client but to the very financial professionals they’ve hired to help them. It's time the finance sector realizes that “diversification” isn’t only having a good mix of stocks and bonds across different economic sectors. There are other phenomenal investment options that offer high growth potential and keep healthy variation in a client’s assets.
If you help a client “diversify” and their portfolio still only contains a mix of stocks and bonds, there’s a good chance you haven’t given your client the full list of options. Utilizing a self-directed IRA is a unique solution to ensure your client covers a wide variety of alternatives for retirement investments. Many of these specific asset classes can add strength and flexibility to your client’s retirement portfolio that isn’t ordinarily considered alongside traditional IRAs, 401(k)s, and defined benefit plans (DBs).
Can You Split These Assets?
Self-Directed IRAs (SD-IRA) are a great way to allow your clients to access investment options that are not typically included in other, more traditional, retirement vehicles. The options inside an SD-IRA can include many things like cryptocurrency, farmland, real estate, precious metals, robotics, and private equity.
I often get questions along the lines of “Can my 401k or defined benefit plan also do carve-outs for self-directed investments?” The simple answer: yes.
In the world of finance, SD-IRAs are subject to a whole host of IRS regulations. Many, otherwise savvy, financial professionals aren’t as familiar with navigating the compliance components that are required for an SD-IRA. This lack of familiarity can generate some reluctance toward these types of investments and that reluctance can be costly if you’re missing out on opportunities that don’t exist elsewhere.
Specifically, you may be failing to secure opportunities that come along with investing in private equity offerings within an SD-IRA.
Private Equity Offerings and SD-IRAs
Most financial professionals are familiar with private equity in some form, even if it isn’t something they work with regularly. The most pivotal issue for getting your client into a private equity offering before “the ship has sailed” is simple: speed of execution. Planning and preparation for the transaction are the key components to address to ensure a client can capitalize on a private equity offering.
Enhancing your speed of execution for these deals is a simultaneous, two-step process:
Step 1: Initiate the carve-out/partial transfer of assets from the existing retirement plan to the new, SD-IRA retirement plan.
Step 2: Complete the necessary subscription/Private Placement Memorandum paperwork while the transfer is in process.
Step 1: Initiating a Transfer
Completing the first step is generally the easiest one. Moving assets from a more traditional retirement vehicle (i.e., IRA, 401k, or DB plan) into an SD-IRA are not as complicated as most people think. Most of these transactions are quite familiar because they are generally simple sales of existing stocks and mutual funds.
Typically, these transfers can be completed between administrators and custodians in less than two weeks. Remember, the initial transfer is only cash so the delay is usually just the time it takes to sit down with a client and decide which stocks and mutual fund shares are the most appropriate to liquidate.
Making sure the cash is liquidated is a crucial factor to ensure the purchases can be made in a quick and timely manner.
Step 2: Compliance Documents
The second step of completing a private equity deal within an SD-IRA is the compliance documentation and paperwork. This is the portion of the process that can be cumbersome and time-consuming. Because of the complexity of the compliance process, one of the key factors for transactions between a 401k and an SD-IRA is to perform this step at the same time as the transfer of cash into the SD-IRA.
Managing the compliance of SD-IRAs is where Chicago Trust Administration Services can help finance professionals become more successful, allowing you to realize the total benefits of SD-IRA carve-outs. We truly relish the opportunity to complete the 70+ pages of compliance documentation that are required. Delays in this step of the process can be extremely costly for a variety of reasons.
Most importantly though, delays can be intolerable because it’s pivotal to get the subscription documents completed and returned to the private equity group within 2-3 days to ensure your client is locked in for the completion of the purchase and eligible for the capital call, which occurs at a later time.
Compliance Documents and Statements: What’s the Industry Standard?
When a client chooses to invest in private equity, as financial professionals, we will typically engage with a firm to complete these transactions. In general, most private equity firms issue quarterly statements followed by the same quarterly dividends and/or distributions. This is the most common scenario you will find.
However, there are private equity groups that focus on monthly-income preferred investors. This type of group is a little more niche than most equity groups and their dividends are provided monthly. If a client prefers this type of investing and dividend schedule, it's crucial to ensure these details before the completion of the private equity purchase.
Successfully Split Assets With Help From Chicago Trust Administration Services
At Chicago Trust Administration Services, we have years of experience navigating the complexity associated with building carve-outs from a client’s traditional investments into SD-IRAs. We work with individuals and other professionals on a personal level to understand their goals and design portfolios that increase the flexibility of their assets while helping them steer clear of any prohibited IRS transactions.
We are the answer to finding a greater level of freedom for your investments and gaining traction in sectors of the market that are difficult to access through other platforms. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
___________________________________________________________________________
*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.