Your Business Exit Strategy Is Incomplete Without This Critical Step
Key Takeaways
Alternative investments in self-directed IRAs typically yield 8-12% annually, compared to traditional portfolio returns of 6-7%.
Tax-advantaged compounding in a Roth SDIRA can generate millions more in retirement wealth over 20 years compared to taxable accounts or traditional portfolios.
Specialized custodians help structure transactions within IRS guidelines while processing deals fast enough to close time-sensitive opportunities.
When you sell your business, you face an immediate, unavoidable problem: what to do with the proceeds. Most business owners default to the same solution their wealth advisor recommends: transfer everything into a traditional IRA or brokerage account invested in stocks, bonds, and mutual funds.
That approach isn't wrong, but it costs you in tax efficiency. Traditional portfolios in a taxable account generate annual tax bills on dividends, interest, and capital gains. Even in traditional IRAs, you're limited to assets that may not match the return potential or risk profile you're comfortable with after decades of building a business.
The critical step most exit plans miss is establishing a self-directed IRA structure that lets you invest business sale proceeds in alternative assets you understand, with tax advantages that can add millions to your retirement wealth.
A complete business exit strategy needs to account for how you'll maximize after-tax returns on those proceeds. Self-directed IRA custodian services make it possible to invest in alternative assets that can generate higher yields than traditional portfolios, all while growing tax-deferred or tax-free.
Why Self-Directed IRAs Work So Well for Business Exit Planning
A self-directed IRA (SDIRA) removes the investment restrictions that limit traditional and Roth IRAs. Rather than limiting yourself to traditional securities, you can invest in real estate, private equity, mortgage notes, tax liens, and other alternative assets that typically generate higher yields.
This is the pivotal decision that separates business owners who maximize their exit wealth from those who simply hand their proceeds to a traditional wealth manager.
The tax structure amplifies those returns. With a traditional SDIRA, investments grow tax-deferred. With a Roth SDIRA, qualified distributions are entirely tax-free — you never pay taxes on that growth.
Structuring Your Exit for Self-Directed Investing
The most effective approach integrates self-directed retirement planning before you sell.
First: Start before the sale. If your business offers a 401(k), you may be able to establish a self-directed 401(k) that gives you broader investment options. Many owners don’t realize this opportunity exists until after the sale.
Next: Know your contribution limits. For 2026, you can contribute $24,500 to a 401(k), plus an additional $8,000 catch-up contribution if you’re 50 or older. That’s $32,500 annually you can direct towards alternative investments.
Then: Time Roth conversions strategically. After your exit, you may have a year or two of lower income before retirement distributions begin. This creates an opportunity to convert traditional IRA funds to Roth IRAs at lower tax rates.
Finally: Diversify across asset classes. Once you have sale proceeds, allocate across multiple investments rather than concentrating capital on a single opportunity.
Alternative Investment Options and Their Return Potential
Self-directed IRA custodian services give you access to investments with potential beyond traditional portfolios.
Real Estate
Direct real estate ownership through an SDIRA can yield 6-10% annually, plus appreciation. Commercial properties, multifamily housing, and industrial real estate all produce monthly income that compounds tax-advantaged.
I have a client who owns warehouse properties generating 9% cash-on-cash returns annually through his Roth SDIRA — demonstrating the advantage of tax-free compounding.
Private Lending
Private lending through an SDIRA typically yields 8-12% annually. You can fund real estate acquisition loans, business expansion notes, or bridge financing. Interest payments flow directly into your SDIRA, where they compound without tax liability.
Real Estate Syndications
Syndications let you invest in larger commercial deals with professional operators. Target returns often range from 12% to 18% annually, depending on the project and its risk profile. Your SDIRA receives its proportional share of income and appreciation.
The Numbers: Tax-Free vs. Taxable Returns
The financial advantage of a self-directed IRA becomes clear when you run the numbers over retirement timeframes.
Assume you invest $2 million in business exit proceeds through a Roth SDIRA in income-generating real estate yielding 9% annually. After 20 years, that portfolio grows to approximately $11.2 million, all tax-free upon qualified distribution.
The same $2 million in a taxable account earning 9% would be subject to annual taxes on rental income and capital gains. Assuming a 25% combined tax rate, your after-tax return drops to 6.75%. After 20 years, you'd have approximately $7.5 million.
The difference is $3.7 million in additional wealth from tax-advantaged investing in higher-yielding assets.
Even compared with traditional stock-and-bond portfolios in IRAs, alternative assets in SDIRAs often outperform. If that $2 million earned a typical 7% portfolio return over 20 years, you'd have $7.7 million — still $3.5 million less than the tax-free real estate scenario.
Critical Compliance Rules for Business Exit Planning
While self-directed IRAs offer significant advantages, they come with strict IRS compliance requirements designed to prevent self-dealing.
The Disqualified Persons Rule: Your SDIRA cannot transact with you, your spouse, your parents, your children, or certain other family members. You cannot invest in a business where these individuals hold significant ownership or serve as officers.
No Personal Benefit Before Distribution: You cannot personally benefit from SDIRA-owned assets. If your SDIRA owns a vacation rental property, you cannot stay there. If it owns a business, you cannot receive a salary. All income and expenses must flow through the SDIRA.
Engaging in prohibited transactions means the entire SDIRA is immediately taxable. Unfortunately, I’ve seen it happen.
Why Specialized Custodians Matter
Large institutional custodians lack expertise in alternative investments and move slowly on transactions they don't understand.
Specialized self-directed IRA custodian services operate differently. We understand the regulatory framework. We structure deals to maintain compliance while moving quickly enough to close time-sensitive opportunities.
At Chicago Trust Administration Services, we've processed thousands of alternative investment transactions over two decades. Our clients come to us because they've identified investment opportunities but need expert guidance on structuring transactions within IRS guidelines.
How Chicago Trust Administration Services Can Help
We specialize in helping business owners develop self-directed retirement strategies that align with their expertise and investment goals. If you're planning a business exit and want to explore how self-directed structures can maximize your after-tax retirement income, we're here to guide you through every step.
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.
Frequently Asked Questions (FAQs)
Q: What happens if I accidentally use personal funds for my IRA-owned property?
A: Using personal funds for IRA-owned property creates a prohibited transaction that can disqualify your entire account, triggering immediate tax consequences on all deferred gains.
Q: How long does it take to transfer funds and purchase property in a self-directed IRA?
A: With experienced administration, the process typically takes 1-2 weeks compared to 4-8 weeks with large institutional custodians, allowing you to move quickly on time-sensitive investment opportunities.
Q: What types of properties work best for self-directed IRA real estate investing?
A: Income-producing properties such as single-family rentals, multi-family units, commercial properties, and resort rentals work well because they generate consistent cash flow.
Properties that require significant personal involvement or frequent renovations pose compliance challenges. Focus on turnkey or professionally managed properties that generate passive income.
*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.
*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.