Can I Roll My 401k Into a Self-Directed IRA?
The IRS imposes stringent restrictions on what can and cannot be invested in with your retirement accounts, including wine cellars, collectibles and life insurance plans as well as tangible alternative assets that do not meet certain purity standards like precious metals.
If you leave or retire, self-directed IRAs provide more investment options and flexibility than traditional investments.
What is a rollover?
Rollover is the process of moving money from one form of retirement account to another, usually when changing jobs or retiring early. They cash out their old employer-sponsored plan and transfer it over into an IRA they control – with IRS rules setting an aggressive 60-day deadline and possible taxes being charged if the process is incomplete properly.
Self-directed IRAs allow investors to invest in both traditional and alternative assets, including commercial real estate, promissory notes, private equity, cryptocurrency and more. This gives more options than what a brokerage firm or human advisor could provide; however, these assets tend to carry greater risk and less liquidity compared to stocks, ETFs or mutual funds.
Indirect rollovers are typically administered by an approved IRS direct-rollover provider such as STRATA Trust Company. To be considered an official provider, this custodian must either be a bank, trust company or licensed to manage IRAs by state and federal governments.
What is a direct rollover?
Direct rollover is the process of moving funds directly from your 401(k) into an IRA without paying taxes on distribution. Each year you may conduct one direct rollover.
Start by opening a traditional IRA at any institution of your choosing (bank or brokerage), then reach out to your former employer’s plan administrator to request a trustee-to-trustee transfer of your old 401(k). When completed, this transfer would mean never coming into physical possession of any funds transferred – thus avoiding the 20% early withdrawal penalty imposed by the IRS.
Failure to do so within 60 days could result in income taxes and penalties; otherwise, an indirect rollover into a self-directed IRA with an experienced custodian provides greater control of investment strategy as well as lower fees.
What is an indirect rollover?
An informed investor must understand their options when moving money between retirement accounts. There are two basic ways of rolling over assets – direct and indirect rollover – with different withholding and taxation implications attached to each method of transfer.
Indirect rollovers require additional processes, including working through an intermediary. But indirect rollovers can help investors comply with IRS rules; for instance, moving your 401(k) funds from one employer plan into another will count as contributions and incur an extra 6% penalty until corrected in your taxes.
An indirect rollover allows greater investment flexibility within your self-directed IRA. Traditional 401(k) plans often restrict you to stocks, mutual funds and ETFs for investments; with an indirect rollover you have access to nontraditional assets like real estate and physical gold that tend to be much less liquid than more conventional securities.
What are the benefits of a self-directed IRA?
Self-directed IRAs (SDIRAs) provide investors with a wider selection of investment options than are typically available through regular retirement accounts, including real estate, precious metals, private equity investments, tax liens and startup investments.
Self-directed IRAs offer investors more control and choice with their retirement savings, but it is important to be familiar with their rules and regulations.
An SDIRA needs a custodian who oversees its assets and ensures all transactions comply with IRS regulations, usually a brokerage firm with experience handling SDIRAs is the ideal choice. Since SDIRA custodians do not allow financial advice, be sure to work with a knowledgeable investment advisor familiar with this type of account as it has certain restrictions as far as what kinds of investments it allows.