Getting Started in a Self-Directed IRA – Leaving Your Job?

Are you planning on leaving your job? Most people who’ve held down a position at the same company for a while have a good-sized sum of money tucked away in their employer’s 401(k) plan. Many of our clients take this opportunity to roll their 401(k) balances from their previous employer into a Self-Directed IRA.

This allows them to take advantage of a wider array of asset classes and strategies available to retirement accounts only via a Self-Directed IRA or related account.

But let’s take a look at your options.

  • Cash it out. In most cases, this isn’t recommended, because you’ll incur an immediate income tax hit on everything you pull out. In addition, your 401(k) custodian will withhold 20 percent of your balance against income taxes. If you’re under age 55, you’ll have to pay a 10 percent excise tax on the entire amount – including the amount that gets withheld and sent to the IRS. So unless you have a desperate need for the cash now, in most cases we don’t recommend cashing out your IRA – especially if you’ll incur early withdrawal penalties.
  • Roll your balance into an IRA or Self-Directed IRA. This is the most frequently-recommended solution, especially for those under age 55. The tax rules are precisely the same for both types of IRAs. The best way to do the rollover is via a trustee-to-trustee That way, the money never enters your hands, and there’s no chance you’ll get charged with a distribution and have to pay income taxes plus the penalty – and you won’t have to deal with the onerous 20 percent tax withholding. To roll your money over to a Self-Directed IRA account with American IRA, LLC, visit our website,, and download and fill out the forms for a trustee-to-trustee transfer. We’ll do the rest, and your 401(k) provider will wire the money directly into your account. Then you simply provide us with written guidance as to how you want your money to be invested.

There are a number of advantages to your heirs in inheriting an IRA rather than a 401(k). Mainly, tax rules require inherited 401(k)s to distribute their balances to heirs over five years or less – a terrible strategy from a tax-efficiency point of view. On the other hand, inheriting an IRA allows your nonspouse beneficiary to spread the distribution over their entire life expectancy (provided you haven’t begun taking distributions yet). This preserves much more of the asset for your family and allows the asset more time to compound, tax-deferred, to generate wealth for you and your family.

The Self-Directed IRA also enables you to choose from a variety of options not generally available via most broker/dealers and other Wall Street investment companies that often sell IRAs and 401(k) products. For example, with American IRA, you not only have access to a full menu of mutual funds, stocks and other securities, but also these important asset classes:

  • Direct ownership of real estate
  • Apartment buildings
  • Farm and ranch land
  • Venture capital and private equity
  • Mortgage and other private lending
  • Closely-held C corporations
  • LLCs and partnerships
  • Tax liens and certificates
  • Gold and precious metals
  • Oil and gas
  • Pipeline investments

And much more.

Leave the 401(k) in place. Not every employer is willing to let you keep their 401(k) in their plan. With smaller balances, especially, if you leave the money in the account too long you could wind up with a check for the balance sent to you in the mail – along with an unwanted tax liability and 20 percent carved out of your distribution.

If you keep the money in your 401(k) you will be limited to the funds and investment options your employer chooses for you.

Roll the 401(k) balance into a 401(k) plan with a new employer. Many people who elect to start their own businesses after leaving their employer take this option – roll the account over into a solo 401(k) plan they establish and control at their own company.

This has a number of advantages, including flexibility, the option to structure your 401(k) plan to allow for plan loans from your 401(k), and nearly bulletproof asset protection.

If this option is something you want to consider, or to learn more about Self-Directed IRA investing in general, call us today at 866-7500-IRA(472), or visit our website at and download one or all of our exclusive guides to Self-Directed IRA investing.