As you look to your future, sometimes unforeseen circumstances can occur. In the event that you find yourself out of a job, that doesn’t mean you have to leave your 401K behind.
Thanks to rollover IRAs, you can preserve that lump sum you’ve accumulated from a 401(k) and transfer it to an individual retirement account.
Self-directed IRAs provide additional benefits and flexibility that traditional IRAs don’t offer.
Fortunately, if you are looking to start an SDIRA with funds you’ve already built, there is a very easy way to transfer your funds.
Rolling over your existing 401K to a self-directed retirement plan can allow you to explore alternative assets, benefit from tax advantages, and could provide a secure nest egg for your future.
Why Rollover to an SDIRA?
One of the greatest benefits of investing in an SDIRA is that it allows you to take control of your retirement plan.
Though the IRS states that a certified IRA custodian must handle your assets, this retirement plan still places you in the driver’s seat. The account holder does all asset allocation, selections, and financial planning.
Additionally, SDIRAs offer great flexibility by letting you invest in alternative assets like gold and real estate–which are restricted by traditional IRAs.
However, as the account holder, you are responsible for any mishaps that may occur when setting up your fund. You must do your due diligence before diving into an SDIRA. Not only does this ensure that you’re capable of managing your own retirement funds, but it also ensures that you’re making savvy investments with your retirement savings.
To recap, an SDIRA provides the following pros and cons:
- Full control over your investment decisions
- Increased flexibility to invest in what you want (i.e., alternative assets)
- Greater diversification than traditional retirement plans
- More research required as you retain greater responsibility over your financial decisions
Investing in Alternative Assets
While most traditional IRA and Roth IRAs through bank trusts limit investments to stocks and bonds, SDIRA accounts can take advantage of many other options. Self-directed IRA owners have the perk of exploring alternative assets, including:
- Precious metals
- Crytocurrency
- Real estate
- Promissory notes
- LLCs
- Commodities
While an SDIRA allows for many investment options, there are limitations. Most collectibles, artwork, and life insurance are considered off-limited by the internal revenue service. While the IRS doesn’t have a direct list of assets you can invest in, it does have a list that specifically states what you cannot.
After considering whether or not a self-directed IRA is right for you, you can take the required steps you need to roll over your 401K.
Rolling Over Your Account: Direct and Indirect Rollovers
Rolling over your 401K to a self-directed account can be a simple task, provided you follow all the necessary steps. After you’ve left your position, if you don’t want to be penalized for moving your funds out of your company 401K, you can distribute them into a self-directed traditional IRA or Roth IRA.
Be sure to find an IRS-approved custodian before making the switch, as companies like Horizon Trust can help ease the process and ensure proper compliance to avoid penalties.
At this stage, you’ll choose between a direct or indirect rollover.
Direct Rollovers
Direct rollovers are the easiest and safest way to move your funds to a self-directed IRA. This is a trustee-to-trustee transfer that avoids any penalty.
You don’t have to hold on to your funds as you wait for the transaction to occur. Before attempting an account rollover, make sure your 401K and new IRA accounts are compatible.
As you begin the process, follow the IRS’s procedure. Even though you are taking a self-directed approach to your retirement account, determining compatibility and understanding the intricate tax codes set forth by state and local governments are great reasons to work with a financial professional when setting up your SDIRA.
Request a statement from your 401K admin and put in for a Direct Rollover Certification form. After completing the proper paperwork and due diligence, all that’s left to do is sit back and wait for the changes. This direct trustee-to-trustee transfer is non-taxable and allows for a quick transfer. If you prefer a more hands-on approach, you may want to consider an indirect rollover.
Indirect Rollovers
If you wish to handle your account transfer personally, you can do so with an indirect rollover. While you still need to follow a similar process to a direct rollover, the difference is you are performing the transfer.
As you pull your money from your 401K for the transfer, account holders have a total of 60 business days to transfer the funds to avoid the 10% early withdrawal penalty. Any rollover must be pre-approved, and the proper paperwork must be completed to follow through with any transaction without penalty.
That means that while taking an indirect approach to your rollover, you should still consult a financial professional to help you do things the right way. The penalties associated with not following any of these regulations are significant.
Step-by-Step Instructions to Roll Over a 401k into an SDIRA
If you’re interested in rolling over your 401k into an SDIRA, it’s important that you understand the steps that you will need to take.
Choose a Brokerage
Begin by choosing a brokerage that will hold your account. Even though you are taking a self-directed approach to your retirement savings, you still need a licensed brokerage to hold the account on your behalf. You will perform your transactions through this brokerage.
Choosing a brokerage that has a history of working with self-directed investors is a great idea, as there are certain rules and regulations that you will be required to follow.
Find a Custodian to Facilitate the Transfer
Part of choosing the right brokerage to hold the account involves choosing a custodian to open the SDIRA. Many specific forms need to be filed for your SDIRA to be legal, so proper experience is a must.
Choose a custodian who has worked with other self-directed investors. Not only does this ensure that your paperwork meets federal guidelines, but it also allows you to receive some expert advice from someone who has dealt with self-directed retirement accounts before.
Act Quickly to Beat the 60-Day Window
It is crucial that you act quickly, as you only have 60 days to invest your funds without suffering any sort of penalization. That is why you should have a plan before beginning the rollover process.
Paperwork takes time, and forms aren’t always filed instantly. Having a plan ensures you get everything done before the end of your 60-day window.
If you’re conducting an indirect transfer, you’ll need to file the paperwork yourself and ensure that it is filed before the 60-day deadline, and you face a steep penalty from the IRS.
Start Investing
Finally, once everything is filed and ready to go, you can start investing your funds in alternate asset classes.
Choose an asset class that you are familiar with, so you can make more informed decisions before watching your retirement savings grow.
Taking Control of your Retirement Plan
As you prepare for your future, performing your due diligence with any investment matters is crucial. As you take charge of your retirement savings with a self-directed account, be sure to follow any regulations set up by the IRS.
Fortunately, Horizon Trust offers the knowledge and expertise you need to facilitate a 401(k) to IRA transfer and help you get started with your new investments. Contact us today to schedule an appointment or speak to a representative to get started on your transfer.