Transferring Funds to Your New SDRA

Next, you have to transfer funds from your traditional custodian to your self-directed custodian.

Self-directed custodians usually have paperwork that you have to fill out to tell them how much is coming in, where it’s coming from, and how the funds should be characterized (IRA funds, Roth funds, etc.). Normally, the new custodian will need a copy of your most recent statement for the account where the money is. The point of this is that the money either comes in by check or by inter-bank transfer, and the operations department at the new custodian needs to be able to identify it when it comes in. If they can’t identify it, they may eventually send it back where it came from.

  • You also have to give instructions to the existing custodian.
  • The holdings in your current account have to be liquidated so that you can send cash, or
  • It may be possible, though rarely, to send the existing holdings “in kind” from the current custodian to the new custodian.
  • The existing custodian has to be told where to send the money or assets.

Each of the custodians will have their own procedures for getting the process started.

Note that in some cases the transfer of funds from one custodian to another can take a while. After all, the old custodian, usually a financial institution, doesn’t really want to lose the assets under management. If your current retirement accounts are managed by a financial advisor, he or she will be taking a “hit” in their income when the funds disappear.

Can your current financial advisor continue to get management fees from your new custodian? Mostly no, they can’t. Financial advisors are often restricted in their sources of compensation because of securities compliance restrictions at the financial institutions where they work.

One exception to that would be RIAs (Registered Investment Advisors), which generally are independent of financial institutions and use broker/dealers only to custody investment assets. Nevertheless, many of them will be reluctant to be paid for “management” of your non-traditional investments because they are not trained to evaluate them and don’t want to be blamed if the investment goes “south.” Only a few are prepared and qualified to do the “due diligence” review of non-traditional assets that would be required for them to feel comfortable to be paid based on the value of the asset.

Because of the timing issue, it’s best to get your new self-directed account open and the money transferred well in advance. If you are buying a parcel of real estate, for example, and you want to make a deposit, they money has to be in the new retirement account when you need it.

The next issue is how to characterize the transfer from one custodian to another. The language used on the forms of financial institutions for the transfer instructions can be confusing. Is it a “rollover,” a “direct rollover,” an “indirect rollover,” a “custodian to custodian transfer,” or what?

There are essentially two ways to transfer funds from one custodian to another.

  • The “60-day rollover.” The Internal Revenue Code allows you to take a “distribution” from your IRA and then “roll it over” to another IRA. What happens is that your existing custodian sends you a check, payable to you, and you deposit the check into a bank account. Within 60 days you have to deposit the exact same amount into the new account. This method is risky:
    • If you miss the deadline, the distribution becomes reportable income on your tax return that year.
    • You can only do 1 60-day rollover in any twelve calendar month period. Funding for a SDRA often comes from more than one retirement account, so completing the funding with a 60-day rollover isn’t a practical way to do it.
  • The “trustee-to-trustee transfer.” In a trustee-to-trustee transfer your current custodian transfers the money directly to your new custodian by wire, check, ACH or “in-kind” transfer. There is no distribution to you. The money doesn’t go through your personal taxable account. Because there is no distribution to you, you can direct any number of trustee-to-trustee transfers in any given twelve month period. Trustee-to-trustee transfers are the normal method of transferring assets or cash from one retirement account to another.

The forms that custodians use to have you authorize the transfer can be somewhat confusing.

  • The trustee-to-trustee transfer can be referred to as a “direct rollover.” Technically the term “direct rollover” refers to a transfer between the trustee of a qualified plan, a 403(b) plan or a governmental plan, to an IRA or Roth IRA.
  • You might encounter the term ‘indirect rollover.” That generally refers to a 60-day rollover.

So, be sure that when you give instructions to both of your custodians involved that you are clear what their forms are asking you and that you are correctly identifying the type of transfer you want to take place. Both custodians will report the transfer to IRS, and if they report it incorrectly, it can cause you a mess on your income tax returns.

If your first custodian thinks that the transfer is a 60-day rollover, they will report the transaction to IRS as a distribution, and you will get an IRS Form 1099R from them at the beginning of the following year. That means they have reported the transfer as a distribution to you. By then it may be too late to correct the records.

If the transfer is done correctly, through a trustee-to-trustee transfer, there will be no report to IRS of a distribution to you.