Self-Directed Roth IRA

How to Roll Over 401(k) Funds into a Self-Directed IRA Correctly

When you leave one employer for another, you have to decide what to do about the funds in your 401(k). Of course, you might be allowed to leave your money right where it is. That would be the most comfortable option because you would not have to do anything.

However, just because it’s the easiest option does not necessarily mean it’s the best option. And in this case, it probably is not. If you leave your money behind, you lose control of your investments, and you will be stuck with too few investment choices. It’s also unlikely that you would ever be able to make future contributions to the plan. So, the conventional wisdom states that if you leave your employer, so does your 401(k).

Another option available to you is to transfer your 401(k) to your new employer’s plan. While this is a better choice than leaving your assets with a former employer, it is not without its drawbacks. You will probably have to wait until you are eligible to join the new company’s plan, and once again, you will likely be left with few choices of investments.

Rolling over your funds into a Self-Directed IRA is almost always your best option
There are two different methods for moving your 401(k) to a self-directed or Traditional IRA. Either one will get your funds into the Self-Directed IRA, but one of them requires you to be cautious and follow a strict timetable to avoid breaking the established IRS rules, which means paying taxes and a penalty.

Here are the two ways to move your 401(k) to a Self-Directed IRA. You can decide which one makes the most sense:

The Indirect IRA Rollover
When you choose an Indirect IRA rollover, the 401(k) custodian sends you a check for the balance in your account. Sometimes the custodian will automatically deduct 20% as a tax withholding.

After receiving the funds, you have up to 60 days to deposit the entire amount into a tax-deferred retirement account. Any amount you fail to deposit within those sixty days will be treated as a withdrawal and will likely be subject to income taxes and early withdrawal penalties.

Even if you deposit on time, you will have to come up with the 20% that was deducted from another source and wait for your tax refund months later.

You may perform only one indirect rollover per year, so keep that in mind if you are planning to use this method.

Direct Rollover
A direct transfer, or trustee-to-trustee transfer, will move your 401(k) plan funds to a Self-Directed IRA without you ever taking possession of the assets. You do not have to be concerned about taxes or early withdrawal penalties. And you will not have to come up with the 20% that was automatically taken out for taxes.

As you can see, this method is easy and pain-free. You fill out some relatively simple paperwork, and your new brokerage firm will initiate the transfer from your old brokerage. Once the funds are transferred into your Self-Directed IRA, you will have the control and flexibility to decide how and where you want to invest with a much wider variety of options from which to choose.

Also, your retirement accounts can now be consolidated, which makes it simpler to maintain records and balance and diversify your assets.

Rollovers are as easy as 1-2-3
Rolling over a 401k into an IRA is simple, and is essentially a three-step process:
1. Open an IRA: If you do not already have an IRA, opening one is a simple matter. If you choose a firm that specializes in Self-Directed IRAs, you will expand your investment choices greatly.
2. Move your funds into your new IRA via a trustee-to-trustee transfer
3. Allocate your funds: Your new custodian might put your funds into a money market account, so you will need to allocate the money according to your risk tolerance and goals.

Interested in learning more about Self-Directed IRAs? Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation. Download our free guides or visit us online at