Rolling your own Self-Directed IRA from a 401(k)

It can be a struggle for many to keep straight all of their financial information and retirement planning. From standard IRAs to 401(k) accounts (and everything in between them), tax time can get very confusing. (Shoot, it can get cumbersome and confusing when it’s NOT tax season!) This is why it may be wise to consider all of the potential advantages of moving funds from your 401(k) program into a self-directed IRA (SDIRA)—once you’re fully vested in your employer’s 401(k).


Now, you might be asking yourself: “Why should I switch?”

As it turns out, there are many compelling reasons that might induce you to consider transferring everything from your 401(k) retirement account into a newly-created SDIRA—and these hold especially true when your target account is a checkbook control account or self-directed IRA LLC. Let’s look at the highlights.

#1 More control. You yourself make all the choices with your SDIRA LLC and do not need the oversight of any account trustee, custodian or middleman.

#2 Broader range of investment opportunities. Paper investments are no longer your only option. Case in point: you can make brick and mortar investments in real estate, businesses or rental property with your SDIRA.

#3 Diversification is easy. Again, you’re carrying the mail here. Nobody but you is in the driver’s seat. Make your account as homogenous or as varied as your tastes.

#4 Retirement investments are consolidated. At any given time, your recordkeeping is easier, you spend less time staying on top of things and you have a much firmer grip on your financial situation.

#5 Your overall fees are lower. Those administrative fees on 401(k) accounts can be downright lethal. Self-directed accounts, especially those where you have checkbook control, do not necessitate the same degree of administrational oversight, which results in fewer fees.

#6 Stability. Trustees and fees can change at the blink of an eye when it comes to 401(k) plans, often with little advance warning, but this isn’t the case with SDIRAs. There is more constancy with the manner in which you conduct your transactions and make your reports so you don’t have to worry about unexpected fees or unexplained changes.

#7 Recordkeeping is simplified. The necessity of maintaining true and accurate records cannot be overstated, not only to assist in ensuring your own financial affairs are kept in order, but also for ensuring the tax man is kept happy. It’s typically a good idea to reduce the number of accounts you’re working with when simplification is your goal.

#8 Penalties are eliminated. Penalties… there are just too many, and you’ll face them when you cash out altogether. But you should know that rolling your 401(k) into an IRA will not hit you with the same financial gouge marks. The upside is obvious. There are no crippling fees associated with withdrawing your money and investing it as you see fit, which makes the available funds you have all the more useful to you.



Now that we’ve gone over a few of the reasons why you might want to consider transferring funds into a SDIRA, you’ll be happy to know the process is mostly painless. When making the switch the direct transfer method is the only way to proceed. This lets you avoid risking 1) a 20% loss of origination 401(k) funds, 2) taxes on the 20% lost, and 3) early withdrawal penalties of 10% when under the age of 59.

To make the change, all you have to do is make some notifications. Tell the financial institution holding your SDIRA account and the custodian of your 401(k) plan that the funds in the latter should be sent to the former. This is a direct transfer: none of the money will be given to you.

At this point, sit back, relax, and wait for the process to complete itself. Generally, this can take 30 days or so. Once the funds are live in your SDIRA, you can start making active investments.

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