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

Self-Directed 401(k) Corner: Are You Keeping Up with the Joneses? Average 401(k) Balances by Age

The average 401(k) balance, according to a new study from Fidelity Investments, is $106,500. But that figure by itself does not tell us anything useful: First, the figure includes investors of all ages. It does no good for people who are relatively young or old to compare their balances with this average. A 25-year-old with an average balance of $106,500 would be doing very well indeed, while a 65-year-old with this balance would be in scramble mode.  The study likely does not include many Self-Directed 401(k)s – Fidelity mostly handles employer accounts with very few Self-Directed 401(k)s, if any.

Second, 401(k) average balances are skewed way upward by a few extremely successful investors. We can tell because the median 401(k) balance – where the investor at the 50th percentile stands – is much lower than the mean balance-weighted average. This holds true for every age group, which Fidelity broke out as follows:

Ages 20-29

According to Fidelity data, the dollar-weighted average 401(k) balance for the youngest cohort of investors – those just starting their careers – is $11,600. But the median 20-something has a 401(k) account balance much lower than that – just $4,000.

And that’s only of the subset of 20-somethings that has a 401(k) balance at all. Many people in this age group have no access to an employer-sponsored retirement plan at all. Or if they do, many of them have not started contributing yet. The average student loan balance for recent graduates is well over $30,000, while the average monthly student loan payment among those not still in deferment is $393 (median $222), according to data from the Federal Reserve.

Ages 30-39

On average, 30-somethings are sporting average 401(k) balances of $43,600, according to Fidelity’s data. The median account balance is $16,500.

One data point to note: These are individual account balances, not total account balances from possible multiple employer plans accruing to individuals. An individual in his or her late 30s with three different plans from private employers of $15,000 each would show up as three accounts of $15,000, not $45,000.

So, the average balance is skewed upwards by a few hypersavers and outperformers with exceptionally skillful (or, more likely, lucky!) 401(k) allocations. But the median is pushed downward by the balances at former employers of prolific savers.

Ages 40-49

The average 401(k) balance for 40-somethings is $106,200. The median balance, again, is much smaller than the mean average: $36,900. However, in both cases, the balance easily doubles. This is partly a function of both men and women entering their peak earning years in their late 30s (for women) and late 40s (for men).

There’s also a post-student loans effect: There is more cash available to contribute to retirement funds once student loans are paid off. Furthermore, contributions get a boost once children, born in their parents’ early to mid-20s – are grown and college, if any, is paid for. Parents can frequently increase contributions in their late 40s.

And, of course, there is the increasing contribution that appreciation makes. The older you get, and the higher your balance, the greater the effect of interest and earnings of investments made in prior years, compared to current contributions.

Ages 50-59

The average 40(k) balance for those in their 50s is $179,100. The median balance is $62,700.

This cohort benefits from catch-up contributions, which allow them to contribute an additional $6,000 per year to their 401(k) plans once they turn 50, though only a small percentage of plan participants actually does this.

Age 60-69

The average 401(k) balance for the 60s cohort is $198,600, according to Fidelities data, while the median balance is $63,000.

These individuals can still make catch-up contributions, and are not yet subject to required minimum withdrawals, which won’t become necessary until April 1st of the year after the year in which they turn age 70½.

However, at this age, some of them will have already started to take distributions. There is no penalty on 401(k) distributions after age 59 ½, and for those who have already left the work force, there’s no penalty after age 55.

In reality, both the mean and median income levels listed here are inadequate to fund a comfortable retirement for most of us. As you emerge from your 20s and 30s, you should have retirement balances that are several times greater than your current income.

For more on this topic, see our recent blog post, “How Much Should You Have Saved In Retirement By Now?”

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

When I Change Jobs, What Should I Do with My 401(K)?

If you are considering switching jobs to improve your financial status, that is understandable. Just make sure you know what impact your leaving will have on your retirement funds.  For example, your 401(K). The wrong decisions now could end up costing you thousands of dollars in future employer matches, taxes, and maybe even penalties. That relatively small pay raise might not be worth the devastating effect the move could have on your retirement.

Here are some things to think about before you make that important decision:

Check on your employer’s vesting schedule

If your employer is matching the amounts that you contribute to your 401(K) plan, those funds are typically not completely yours for several years. In other words, if you leave before you are 100% vested, you will forfeit some of the 401(K) funds that your company contributed. Keep in mind that any funds that you contributed through payroll deductions are always 100% vested, no matter where you work.

Here is an example of a typical vesting schedule:

  • After one year of service: 0% vested
  • After two years of service: 20% vested
  • After three years of service: 40% vested
  • After four years of service: 60% vested
  • After five years of service: 80% vested
  • After six or more years of service: 100% vested

Under this schedule, if you had saved $20 per week for two years, you would have $2,000 toward retirement. If your employer matches dollar-for-dollar, you would have another $2,000 in your account. If you decide to quit, however, you would only receive $400 of your employer’s contribution. That’s a $1,600 impact that changing jobs would have on your future retirement savings!

Consider your options carefully

Most workers have four options for their 401(K) when they leave a company:

  1. Cash out: This option should be off the table for you. You will owe taxes and penalties, plus you will immediately be pushed into a higher tax bracket. You will be lucky to walk away with half of your money!
  2. Leave the money where it is: If the investments in your current plan are performing well and the administrative costs are reasonable, this might be a viable option. But while it is better than cashing out, leaving your 401(K) with a former employer will rob you of a certain amount of control. There are better options.
  3. Rollover into your new employer’s qualified retirement plan: If your new employer offers a 401(K) plan, they will likely accept a direct rollover from your previous plan. You might have to leave your funds in your old plan until you are eligible under the new plan, but many will allow rollovers immediately. Just make sure this is a plan-to-plan transfer and the money is not sent to you. It creates all sorts of complications that a true rollover avoids.
  4. Rollover into your IRA: This is your best option for a host of reasons, not the least of which is the freedom to choose from a variety of investments not always available in company retirement plans. By using a Self-Directed Rollover IRA, for instance, you not only choose from common stocks, bonds, and mutual funds but also from real estate, private stock, precious metals and other alternative assets. Not only that, but you avoid the high administrative fees that can stunt the growth of your retirement savings. And you make the decisions on which investments are right for you.

It’s up to you

The financial fallout from changing employers might be significant, but there is no reason to compound the consequences by making poor decisions with your 401(K) funds. The money to which you are entitled is not a short-term windfall but a long-term investment in your future. Approach it that way!

Take control of your 401(K) funds when you leave your job

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

What Mistakes Millennials Make When They Should be Rolling Over Their 401(K)

Getting an early start on saving for retirement is critical. If you do not believe this, here is an example:  A 22-year-old worker earning $40,000 starts saving 6% of that in a 401(K) while the employer adds another 3%. Assuming a 6% rate of return, that person will have accumulated $827,000 by the time retirement rolls around at age 67.

If that same worker waits until age 30 to start saving, that same annual contribution of $3,600 will have grown to $490,000—that’s $337,000 less!

When it comes to accruing a substantial retirement nest egg, time can be even more important than the type of investments you choose. Those eight years from the previous example can never be recovered, so it is crucial not to waste them.

The time to Rollover the old 401(K) is now!

Many millennials are missing out on saving for retirement during these all-important early years on the job. By the time they have reached the age of 32, the average millennial will have had four different jobs—and over 20% of them have changed jobs in the past year! That rate is three times higher than earlier generations.

While living for today and disregarding the future might seem to make sense to a twenty-something, that same person could be filled with regrets when it is hard to make ends meet in retirement. This short-sighted philosophy can result in millennials cashing out their small distributions and paying the taxes and penalties they owe.

Worse yet, many of them, believing the paperwork is not worth the effort, abandon their 401(K) plans as they move on to the next job. In doing so, these young workers are missing out on the magic of compounding, as even the smallest accounts can grow to be substantial amounts.

Here’s another example:

A young worker decides to change jobs at the age of 26, having accumulated $7,000 in a 401(K) over four years of work. That amount does not seem significant enough to make a difference, so the worker cashes in and puts a down payment on a car. After paying taxes and penalties, there is about $5,000 to put toward the car.

If that same worker rolled that $7,000 into an IRA and allowed it to grow at a 6% rate of return until retirement, it would be worth over $81,000 and that car would have been long forgotten!

It is easy to roll over a 401(K) managed by your former employer to either a plan at your new company or to your IRA. And even if it is a bit of a hassle, the previous example should convince you that your efforts will be handsomely rewarded.

Some millennials opt for an indirect rollover

It sounds like a good idea on the surface. The indirect rollover allows you to receive a check when you leave your job and then roll the proceeds into another 401(K) or IRA at a later date. But this method is fraught with complications: You have the responsibility of getting this money to the right place, and you must do it within 60 days. If you cannot manage that, you will be hit with taxes and penalties.

One more reason to stick with a direct transfer: Your old employer is required to withhold 20 percent from your distribution for income taxes, so to keep from having to pay taxes and penalties on that 20%, you need to come up with that amount for the rollover and wait until you file your taxes to get back the withheld amount.

Possibly the biggest mistake millennials are making

As mentioned, many younger workers believe that retirement is a long way off and they need not concern themselves with it just yet. As a result, they choose not to participate in their employer’s 401(K) plan, and they miss out on those essential early years that allow compounding to begin sooner and turn small amounts into substantial savings at retirement.

Contributing to an employer’s 401(K) is the best way to put retirement savings on auto-pilot and save money on taxes right now. Once the plan is set up, you can begin to revolve your budget around the new net pay. Most people don’t notice the difference in their paychecks after a few weeks, but after a few years, they will be paying attention to that growing sum of money in their retirement account.

When you get right down to it, the biggest mistake the younger generation is making is not having anything to roll over when they hop to their next job.

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