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

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

You May Have a 401(K) and a Self-Directed IRA

Like many retirement savers, you might believe that if you have a 401(K) through an employer, you cannot open an IRA. But that is not true. As long as you meet the eligibility requirements and follow contribution guidelines, you can open a Self-Directed IRA even though you have a 401(K).

Another misconception about Self-Directed IRAs is that you can only invest in stocks, bonds, and mutual funds. And with a Traditional IRA, this might be true. With a Self-Directed IRA, however, your choices expand to real estate, tax liens, private stock, precious metals and more.

Add flexibility to your retirement portfolio with a Self-Directed IRA

Talk to anyone who has a 401(K) through their employer, and they will probably complain about the limited amount of investment choices they have. (Some offer only a few bland mutual funds and a money market account!).

Sometimes the mutual funds that are offered through a 401(K) have fees, typically called “loads,” that are taken out at the time of purchase (front-load) or when you sell them (deferred load). There may also be higher-than-average expense ratios, fees which come right out of your returns, reducing the growth of your funds and costing you tens of thousands of dollars over a typical career.

Adding a Self-Directed IRA to your retirement portfolio can give you immediate diversity since you will be choosing from a wider variety of investments. Those choices can include any of the following:

  • Thousands of mutual funds
  • Exchange traded funds (ETFs)
  • Common stocks
  • Private stocks
  • Real estate
  • Individual bonds, bond funds, and bond ETFs
  • Precious metals including gold, platinum, and silver
  • Tax liens
  • Private lending notes

With the Self-Directed IRA, you have so many choices that you can also choose lower-cost investments for your overall strategy.

You can manage your taxes and your estate with a Self-Directed IRA

After you retire, you can minimize your tax bill by customizing your withdrawals between Traditional IRAs (taxable) and Roth IRAs (usually non-taxable) to get the income you need. Keep in mind that once you reach 70-1/2 years of age, you must begin required minimum distributions (RMD) on your Traditional IRA only.

After you are gone, your heirs must start taking distributions from their Self-Directed Inherited IRA within a certain amount of time, but they may have the option of extending those distributions throughout their lifetimes, which means that the tax benefits of your Self-Directed IRA could stretch out through another generation.

You are also gaining control

You do not need your employer’s cooperation to save in a Self-Directed IRA.  You are in control of the investments, and you can invest in almost anything you want.  You can opt for a regular IRA for immediate tax deductibility or a Roth IRA for tax-free, long-term growth.  Using a Self-Directed IRA in your retirement planning can leave you with more money in your pocket at the end of your career.

A word of caution about control

You can choose practically any investment strategy you wish in your Self-Directed IRA, and that can result in true diversification, lower expenses, and more money toward your retirement. And while having control is a good thing, with it comes certain responsibilities, the most important of which is something called ‘due diligence.’

Simply put, it means that you have taken every reasonable step to ensure that you understand an investment product before you add it to your portfolio. Why? It is because everything in your portfolio comes with some inherent risk. On one end of the spectrum, CD’s carry the almost certain risk of not keeping up with inflation, and on the opposite end, some cryptocurrencies are so volatile they could keep you awake at night.

While there are no risk-free investments, there are those that have the potential to protect you in a down market and those that will contribute toward your portfolio’s long-term growth. Doing the necessary research (due diligence) will help you match your Self-Directed IRA investments to your goals and your temperament.

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

Your 401k Affects Your Self-Directed IRA

Your 401k Affects Your Self-Directed IRARetirement planning has something in common with pharmacology: Just as a doctor needs to understand how certain drugs may interact with one another, retirees and those who help clients plan for retirement should also understand how assets in different kinds of retirement accounts, or participation in a workplace plan such as a 401k, 403b or a defined benefit pension plan affect one another as how your 401k affects your Self-Directed IRA.


Back in 1974, when Congress first passed ERISA, or the Employee Retirement Security Act – the law that authorized the IRA as we know it – they wanted the tax benefits to accrue primarily to people who, for whatever reason, were left out of the employer pension plan safety net. Of course, that safety net was much more robust in 1974 than it is now. At any rate, since Congress was giving up some current revenue and subsidizing retirement savings in IRAs in the form of an income tax exclusion, they wanted to focus that subsidy on those who needed it most: People who had no pension plan at work to fall back on.

They also wanted the benefits to accrue mostly to lower-income and middle-class families. The wealthier, it was thought, could take care of themselves with or without IRA contributions.

And so in order to meet these objectives, Congress came up with a scheme to set limits on who could deduct or exclude amounts contributed to IRAs from their income: Those who had a retirement plan at work had lower limits on allowable deductible contributions than those who didn’t. Furthermore, higher income individuals had their ability to deduct contributions restricted or denied altogether.

While over time the numbers have been adjusted to account for increases in the cost of living, we still have the same system in place for traditional (non-Roth) IRAs: You can contribute more on a deductible basis if you are not covered by a retirement plan at work than if you are. If your income is above a certain level, you may have your ability to deduct contributions restricted. You can, still, however, make non-deductible IRA contributions even if you fall above the income thresholds, up to the maximum total IRA contribution limit, which in 2014 is $5,500. Those age 50 or older can make an additional $6,000.

2014 Contribution Limits

As we mentioned, there are two tables defining allowable contribution limits. If you are covered by a retirement plan such as a 401k, you have to use the more restrictive of the two tables.

2014 Contribution Limits 1

2014 Contribution Limits 2

Note: These are the limits for 2014. If you’re reading this blog post after April 15, 2015, see for the updated contribution limits, as appropriate. Note that for IRAs, you have up until April 15th of the following year to make contributions to an IRA for the previous year. This is different from the 401k deadline: If you are a 401k plan sponsor or contributor, you must complete all your contributions prior to January to have them count for the year.

Note as well that if both you and your spouse are not covered by a retirement plan at work, there are no phaseouts to worry about – you can contribute up to your maximum annual limit – again, $5,500 for 2014 – and double that for married couples, since you can make a spousal IRA contribution, as well. And don’t forget about the extra $1,000 ‘catch-up’ contribution.

Also, don’t let the income limits discourage you. Even if your modified adjusted gross income reaches the income phaseout limits, you can still make contributions to a traditional IRA on a non-deductible basis, provided you have at least that much in earned income.

So you can still get the benefit of tax-deferral on compounding and interest, plus the creditor protection features of IRAs, even though you don’t get the deduction on the contribution itself. Be sure to fill out an IRS Form 8606 if you make non-deductible IRA contributions so you will get credit for the taxes you did pay on money you contributed. Otherwise the IRS might not credit you properly and you will wind up paying needlessly higher taxes when you take the money out.

Since Your 401(k) Affects Your Self-Directed IRA, Many People Ask Whether They Can Max Out Both

In theory, contributing to your IRA does not limit your ability to contribute to your 401k plan, nor vice versa – though you may not be able to deduct some or all of your IRA contribution.

Roth IRAs and 401(k)s

Roth IRAs work differently than 401ks. Since the IRS is still getting its tax revenue on money you earned that you contribute to a Roth IRA (Roth contributions are not tax-deductible), then the original thinking when Congress passed ERISA doesn’t apply. Consequently, Uncle Sam doesn’t care if you also have access to a retirement plan: They are quite happy to let you contribute the maximum $5,500 annual limit (again, add another $1,000 in ‘catch-up’ contributions if you are age 50 or older), no matter what kind of plan you have at work. Contributions to or eligibility for a workplace retirement plan has no effect whatsoever on the amount you can contribute to a Roth IRA. The only factors are your earned income, which must be sufficient to cover the contribution to the Roth IRA, and your overall modified adjusted gross income as defined here:

2014 Contribution Limits 3

If you have more questions about how your 401k affects your Self-Directed IRA, call us today at 866-7500-IRA (472), or visit us at We’ll be happy to help!


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