Rolling Over a 401K to a Self-Directed IRA

A rollover is a transfer of funds from one retirement savings account to another retirement savings account type. The reason that you may want to roll over an account can range from dissatisfaction with the performance of your current account, a change in employment, or maybe you’ve inherited an IRA. Regardless of your reason, there are rules that the IRS has made clear need to be followed so that no penalties or fees come your way.

Rollover vs. Cashing Out

First thing’s first, the temptation to just cash out your existing 401K may be hard to resist but should be avoided at all costs. Not only will cashing out your retirement savings slow the growth of your account, but it will also make your money susceptible to an early withdrawal penalty by the IRS of up to 10% of your total saved funds. You should also be prepared to pay between 7%-25% for state and federal income taxes. These fees will whittle away at your retirement savings, not making it worth the short-term cash-out.

Rolling over your account from one custodian to another will prevent the IRS, state, and federal fingers out of your savings account. Each custodian’s process and rules can vary, but the IRS gives account holders 60 days after distribution to deposit funds into a new account.

Benefits of Rolling Over

With a 401K, you can be restricted to the investments and account options that are available to you. With a self-directed IRA, you will be able to diversify and choose where your money is working for you, and how it’s invested.

When NOT to Rollover

A rollover is not always feasible for many reasons. Perhaps your employer’s plan has lower fees than an account you’re looking to move your money into, or maybe your portfolio has outperformed the market. The biggest reason you may want to leave your 401K be is if your employer has a matching contribution. Employers that offer a 401K match seem to be few and far between, but that’s not the only deterrent, because many employers won’t allow for funds that were earned on their match to be rolled over. So if you’ve contributed at a steady rate for the last 5 years with a 2% match, all that you’re allowed to take with you in a rollover is what YOU have contributed.

Why Not Have Both?

Did you know that by IRS laws and regulations that American’s are allowed to open and contribute to both a 401K as well as an IRA? This is especially beneficial if rolling your 401K over doesn’t necessarily make sense for the time being.