Socially responsible investing (SRI) has grown in popularity over the years, particularly among Millennial investors. As the name may imply, any investment that is “socially conscious” falls under this category, which can include investing in businesses that promote alternative energy, health, human rights, etc. The two goals behind socially responsible investments are to address social challenges and financial gain.
Retirement Plan for Socially Responsible Investments
Using a retirement plan over personal funds to make investments is more tax-advantageous, as the income or gains of the investment is generally tax-deferred or tax-free in the case of a Roth. Older Millennials are great retirement savers, according to Transamerica Center for Retirement Studies. Although Millennials between ages 18-24 are in need of a sturdier push toward saving for retirement, 67% of Millennials ages 25-31 are taking advantage of their employer-sponsored retirement plan.
There are many retirement plans available, the most popular being a 401(k) or 403(b) plan provided by your employer. However, a self-directed retirement plan may align better with socially responsible investments. Many social investors not only support ethical business practices, but avoid “unethical” business practices, and the Traditional IRA may be restrictive in such ambitions.
Traditional IRAs can be limiting in the types of investments you can make, as they are limited to stocks, bonds, ETFs and other traditional investments. While it’s not impossible to find an impactful investment within the stock market, social investing is certainly easier when you have a world of investment opportunities before you, such as real estate, peer-to-peer lending, etc.
Furthermore, self-directed retirement plans, such as the Self-Directed IRA, come with a few added advantages, like investment diversification.
How to Fund a Self-Directed IRA
If you currently have an eligible contribution plan, such as a qualified 401(k), you can fund the self-directed retirement plan through a rollover. You wouldn’t perform a transfer, because a transfer is between like IRAs, and this is the movement of assets between a 401(k) to an IRA.
Two types of rollovers can be performed:
- Direct Rollover
- Indirect Rollover
To complete a direct rollover to the Self-Directed IRA for socially responsible investing, you must request the movement of 401(k) plan funds to the new IRA custodian. You will be assigned to a retirement tax professional who will assist you in completing the direct rollover request form. This will allow you to move your 401(k), 403(a), 403(b), 457(b), or defined benefit plan assets to your new IRA account.
An indirect rollover is when the 401(k) plan funds are first moved to you before you send the funds to the new IRA custodian. In the case of an indirect rollover, you will have 60 days from receipt of the eligible rollover distribution to roll the funds into an IRA. It is advised that you rollover all of the 401(k) plan funds to the IRA custodian. Any portion that you do not roll over within the 60 day period may be subject to a 10% early distribution penalty if you are under age 59 1/2.
Socially responsible investing can be a good investment strategy for individuals who wish to build a retirement nest egg while supporting ethical business practices. With a Self-Directed IRA, you receive the benefits of diversification, inflation protection, checkbook control, tax-deferral, etc., while taking strides to achieve social change.