How to roll over your 401k plan into a Self Directed IRA

If there is one thing that 2020 has taught us, it is that nothing is as certain as it was before.  One of the biggest fears for many Americans right now is their job security.  Many people have already lost their jobs and are wondering what comes next for them.  A major effect of leaving a job, whether it be through retirement, layoffs or simply moving to a new company, is that your 401(k) from your previous employer becomes eligible to be rolled over to an IRA.  

There are a variety of different options that become available to you with your previous employer 401(k) and we have listed the 3 most common options:

1) Moving the funds into an IRA 

If you were a part of a 401(k) plan at your previous employer, one of the most common options available to you on what to do with the funds is being able to move the funds into an IRA at a new custodian. When you leave your job, you have the ability to continue investing those funds on your own in an IRA or Self-Directed IRA, and when moving those funds to another qualified retirement account, you don’t experience any tax hits. 

One thing you would want to consider is what type of investment you plan on doing because this will help you determine the perfect custodian for your needs. Some Americans choose to put their money in a regular IRA and hand their money to a financial advisor at a public custodian to make all the decisions about their account for them. Others choose to take control and invest with a Self-Directed IRA at a non-traditional custodian that will hold private assets. 

You may be thinking about what the difference is between those two types of IRAs. A Self-Directed IRA is simply an IRA in which the IRA owner directs all investments in the account. There is no legal distinction between a “Self-Directed IRA” and any other IRA except with a truly self-directed IRA the account agreement allows the broadest possible spectrum of investments, which could include real estate and private or start-up companies. Understanding the difference between these two accounts shows that there are many options available just within the first category!

A great reason why many people choose to move their funds to an IRA rather than pulling out their 401(k) money is the magic of compound interest when you continue to reinvest. To put it simply, compound interest is “interest on interest”. It may be easy to think that taking a distribution from your retirement account is a quick way to get a big portion of money, and although you may not be wrong, the amount of money you COULD have if you left it inside of your account is exponential. When you take a distribution, your IRA is no longer growing, but when you continue to do deals inside of your account and reinvest those funds, your self-directed IRA is still making money for you. 

The most important part about moving your funds to another custodian is making sure you find your fit. Not all custodians focus on the same thing. Where some custodians like Quest have a focus in free, expedited funding times and IRA education, others boast flashy software or new automated phone lines. Being comfortable with your custodian will make you more comfortable and confident as you take the next step for your financial future. 

2) Leave the funds in a 401(k) 

If the thought of dealing with your 401k is too overwhelming, you may have the option to leave the funds in a 401(k), whether that be with the employer you just left or with your new job. Some employers allow you to keep your plan with them even if you no longer work for them. Even though you’re unable to contribute to the account, your money can still be invested and grow tax-deferred, but contacting the HR department of your previous employer to learn more about the restrictions and opportunities your plan has is recommended. You may also have the option to take your 401(k) plan with you to a new job if you find one.

3) Take a distribution 

During this time, if you need funds to help cover costs like a mortgage payment and immediate expenses, you may be considering taking money from a 401k account. Using 401k funds now to pay for expenses could mean that later when facing retirement, you don’t have that same amount available. The funds in the account also won’t be given a chance to grow during the next decades to build up for your future retirement.

Usually, taking money from your 401k leads to penalties and taxes, but the good news is that the recently passed CARES Act may help with some of these costs. Before the act, rules stated that those who were not 55 years old yet would face a 10% penalty on the amount taken out of a 401k after being relieved from/leaving your job. The CARES Act addresses the COVID-19 crisis and offers temporary adjustments to 401k withdrawals. This allows withdrawals up to $100,000 from your 401k account without paying the 10% penalty provided your distribution meets the criteria. The CARES Act also allows you to spread out the taxes on the withdrawal over the next three years. If the money is paid back within three years, you can avoid being taxed on the distribution that was taken out. This could be a good option for those who need money now.

Being aware that there are many different options, especially with a Self-Directed IRA, may be able to provide some peace of mind in knowing that not all is lost and that you can take control. If you need an IRA specialist, at Quest we are here to provide education no matter what option sounds the best for you. With our weekly webinars featuring investing education or our certified IRA specialist just a call away, rest assured knowing that your money is safe!

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