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!

Keep your 401k plan on the right track

Many adults pay into 401k plans without fully understanding what the investment means. There is certainly the overarching understanding that a retirement plan is for life after working a corporate job. 

What does a healthy 401K account look like, though? You may want to consider the following concepts when determining if your retirement plan is on the right track.

How often do you pay into your 401k plan?

Employee contribution is the primary source of your retirement plan. You cannot expect to retire in riches when you only pay into your 401k account every quarter. 

In a similar vein, the amount that you invest is also important. Those who choose to give higher percentages of their paychecks will naturally see more returns than those who invest less money in their 401k plans every two weeks.

Did you roll funds from a previous account into your new 401K plan?

Cashing out your retirement savings when you change jobs is not always the best way to plan for the future. Many working adults find themselves spending the lump sum of money irresponsibly even after promising to invest the money from a previous 401k plan in stocks.

It is often best to roll over the money from your former 401k policy into your new plan without even considering how much you would receive from a big cashout. Conducting business in this manner allows you to continue to build for the future without the temptation of instant gratification.

Does your company contribute to your 401k plan?

You should not rely on your employer to make your dreams of financial stability after retirement a reality. It is, however, good to work for a company that invests in the futures of its employees. 

The best businesses match employee contributions to 401k plans. Even those corporations that contribute less than half of what you give are still providing money from which you may benefit in the future.

Is your 401k plan ready for retirement?

The amount that you need to comfortably retire depends on a number of factors, which are not limited to the type of lifestyle you want to have after leaving your mainstream job. It is also important to consider the amount of debt you may have after retirement. Making higher contributions to your 401k and ensuring that all monies from previous plans have rolled into your new account are the best ways to optimize your retirement plan for the future.

Quest Trust Company offers an individual 401k as well as many other retirement savings options, including self-directed IRA and Roth IRA accounts. We offer truly self-directed investment options as well as fast processing times and low fees. Contact a financial expert at Quest Trust Company today to open an account today.

Steps to set up a solo 401k

401k accounts are retirement accounts that are set up and managed by your employer. However, if you are a freelancer or entrepreneur that runs your own business, you may want to set up a 401k just for yourself. 

Many people don’t realize they have this option, but it’s a great way to build up your savings for retirement. Setting up a solo 401k can be tricky at first – here are the basic steps to get started.

Choose a 401k provider

The first step to opening a solo 401k is choosing a provider. Many financial institutions offer solo 401ks to their customers, so they’re fairly easy to find. There are several things to take into account when choosing a 401k provider, but the most important factors are fees and investment options. 

You’ll want to make sure your provider has investment options you like, and that you have enough flexibility when putting your plan together. You should also look for a provider with low fees, as high transaction fees can really add up.

Fill out your application

Once you’ve decided on a provider, you’ll need to work with them to fill out your paperwork and get the account set up. 

You’ll need to fill out your employer kit with a plan adoption agreement for a solo 401k. These are complex and can be confusing to fill out on your own, which is why it’s so important to have a provider you trust walk you through them. 

You will also need to prepare your employee disclosures about your business to send to the IRS for tax purposes.

Open your account

Once you have all of your paperwork filled out, you can set up an account and make contributions as you see fit. Since you are both employer and employee, you can make one sum contribution instead of worrying about employer matching.

When you’re setting up a retirement account, it’s important to make sure you’re working with a reputable financial institution you can trust. 

Quest Trust Company offers an individual 401k as well as many other retirement savings options, including self-directed IRA and Roth IRA accounts. We offer truly self-directed investment options as well as fast processing times and low fees. Contact a financial expert at Quest Trust Company today to set up your account.

How does a Solo 401k Work?

Solo 401k plans are employer-sponsored retirement accounts that offer self employed individuals with no common law employees other than a spouse the opportunity to establish a Profit Sharing Plan. 

Many companies offer solo 401k accounts to their employees, but not many people understand exactly how they work. 

Here’s what you need to know about your solo 401k before you get started:

You are the Employer and Employee of the Account

Although your solo 401k is an employer plan, it allows the business owner to be the Trustee of the plan, granting them access to make fiduciary decisions.

The Trustee will work with a financial institution to set up the account, and they will determine where to hold the funds, how much you contribute to the plan, and what investment to partake in. 

Rollover of previous accounts into the Solo 401k

You may have pre-existing 401k plans or IRA’s that you may want to consolidate inside of your Solo 401k. As long as those funds are pre-tax they can be rolled into the plan.  

If you are looking for a Roth Solo 401k, you may conduct “in plan Roth conversions” to convert your pre-tax funds to Roth. 

You are not able to move Roth IRA’s or previous Roth 401k’s into your solo 401k. However, You are able to contribute to a separate Roth IRA if you have one while continuing to make contributions to your Solo 401k. 

Taxes Advantages

By Contributing to your solo 401k and possibly to another Traditional IRA, you may be eligible to receive a tax deduction. This all depends on your modified AGI (adjusted gross income) in determining if you are eligible or not. 

Keep in mind that Solo 401k accounts are retirement accounts and non-qualified distributions are subject to penalty and taxation. The Solo 401k does have an option to take a loan out but it is limited to 50% of the account balance and cannot exceed $50,000.

If you’re looking to set up a retirement account, contact the experts at Quest Trust Company today. We offer Self-Directed IRAs and Solo 401k plans for individuals looking to invest into alternative assets. Our financial experts can help you find an account that makes sense for your financial needs.

Difference Between a Roth IRA and a Roth 401(k)

Many people can find similarities between a Roth 401(k) and a Roth IRA. Each contribution for each type of account will be made after taxes have been completed. The earnings from these accounts can be removed without being taxed at the age of 59 ½. Though these accounts have many parallels and similarities, they are also very different in a few key features.

How much is contributed

One of the biggest determining factors of a 401(k) is its contribution limit. Usually, the contributions have a high limit, which allow employees with a 401(k) plan to save around $18,000 annually. For a worker is over the age of 50, the limit for contributions made per year is $24,000 because of the catchup contribution caveat. IRAs have smaller contribution limits per age range. The typical limit is $5,500, but if you are employed and you are over the age of 50, you have the potential to contribute $6,500 to your IRA a year.

How its Distributed

One of the best parts of a Roth IRA is how the account can go on forever, and no minimum distributions are required at a certain age. It can also be passed along through generations, which can accumulate free earnings for each generation.

A Roth 401(k) is completely different, though. Once you reach the age of 70 1/2, this type of account will actually require distributions to be made. This might not necessarily be a bad thing if you are in the position where you need the money. If you want tax-free savings, though, there is a way to get around it. Rolling over to a Roth IRA will be better in this situation. The person in charge of the account has the option of switching their account, but it’s up to the needs of the person in charge.

Options for Investment

Account holders who want to invest into their accounts are given way more control over their Roth IRA than their Roth 401(k). People looking to invest are given many different options when it comes to investing. They can invest in stocks and bonds, for example, but the control over the funds that an employer can offer becomes extremely limited when making investments for a 401k plan. Employees can increase their options when they maximize their employer’s match and then use extra money towards their Roth IRA. This gives the employee the option to have full access to IRA options for investment they otherwise would not have had because of the restrictive employer’s plan.

Limits on Income

Contributions to a Roth IRA are off-limits when the modified gross income is at least $196,000 after it’s adjusted, and you are married or filing with a significant other. If you are filing IRA contributions with a significant other or a spouse, the limit goes beyond at least $133,000. This is a drawback of using a Roth IRA. With a Roth 401(k), there is no limit on income.

How to Rollover 401k to IRA

After leaving a job, you may be wondering what on earth you should do with your old 401(k) funds. There are a few options to consider, each with their pros and cons. Always consult your financial advisor before transferring funds, as they can offer advice on which type of transfer is best for your stage of life and how to move the funds hassle-free. Your 401(k) options include:

    • Keeping your funds where they are
    • Rolling the funds into an IRA or Roth IRA
    • Transferring the funds into your new 401(k)
  • Cashing out

If you keep the funds where they are, your old employer won’t make any matching contributions, and you may not be able to make any contributions yourself depending on your employer’s specific rules. You will also be limited to the plans they provide or the fees they entail, which you may or may not like. Consolidating your 401(k) funds into a plan of your new place of employment will keep things simple and all in one place. If you change jobs frequently, having multiple plans sitting at each old place of employment may get confusing.

Cashing out is usually only utilized as a last resort option. You may be subject to a 10% fee if you are younger than 55 or between 55 and 59 but still working. You can avoid the 10% fee if you are older than 59 ½ or you are between 55 and 59 but are retired. What you withdraw will also be counted as taxable income and may bump you to a higher tax bracket. If you need to supplement your income until you have a steady stream once again, most advisors suggest only withdrawing the absolute minimum necessary and rolling over the rest into an IRA.

Rolling Over a 401(k) to an IRA

If your employer writes a check directly to you for the funds in your 401(k), you will have 60 days to deposit those funds into a new qualified plan. Failing to deposit the funds within 60 days will result in taxation on the funds since it will be considered income, as well as a 10% fee if you are not 59 ½ yet. Furthermore, the IRS requires that your employer withhold 20% of the funds just in case you don’t make the deadline, so they are guaranteed their tax money. If you make the deadline, however, you should receive the 20% back at tax time. You can avoid all of this by doing what’s called a “direct transfer” from the 401(k) account into your new IRA account. This is usually done electronically as long as you have an account set up with a qualified institution already.

If you transfer a standard 401(k) into a Traditional IRA or a Roth 401(k) into a Roth IRA, everything should go smoothly. If you transfer a standard 401(k) into a Roth IRA, you will likely owe taxes on the amount. This may be advantageous if you are expecting the tax rates to be higher than they are now at your retirement since Roth IRA distributions are tax-free. Before converting, always seek the advice of your financial advisor.

What Happens to My 401(k) Plan If I Switch Jobs?

When you feel it’s time to change jobs so you can live up to your fullest potential, there are some lingering questions that may keep you hesitating. One of these is typically about what happens to your retirement savings when you switch companies. It’s your money and you need to be aware of how you can get access to it when you make the switch. 

There are typically four ways in which you can deal with a 401(k) retirement plan when you switch employers. Each one of these comes along with their own benefits and their own downfalls. We encourage you to weigh all of the options before making a final decision, so you don’t regret your decision later down the road. Let’s take a look at what these options are. 

1.) Liquidate For Cash

The first option you will always have is to liquidate your 401(k) to receive a payment in cash. This comes with the benefit of receiving your savings in cash. The downfall of this approach is you are subject to State and Federal Withholding Taxes and possibility an early withdrawal penalty. The Federal Withholding Tax is 20 percent of the amount in the account and the State requirements differ. If you are under the age of 59.5, you are subject to a 10 percent early withdrawal penalty when you cash out.

2.) Rollover To Your New Employer

Most companies will allow you to rollover your 401(k) from your previous employer. You should check with your new employer to ensure this is an option for you. With this option, you don’t have to worry about paying taxes just yet or any sort of withdrawal penalty. 

3.) Rollover Into A Traditional IRA 

If your new employer doesn’t allow you to rollover your 401(k) from your old employer, you have another option. You can rollover your existing 401(k) into a traditional IRA account. This is also a feasible option for those who simply don’t like their new employer’s 401(k) funding options. By rolling your money over into an IRA, you have the added option of choosing from a larger scale of investing options. Realize that once you rollover your old 401(k) into an IRA account, you probably won’t be able to roll it back over into a 401(k) account in the future. This is simply due to the fact that many 401(k) plans don’t accept IRA rollovers. 

4.) Leave Your 401(k) With Your Old Employer 

Depending on the options you have with your old employer, they may allow you to keep your 401(k) with them. This is typically under the assumption that the account is left as-is, meaning no more contributions can be made. This is always an option you can look into if you are not quite sure what you want to do with your 401(k) yet. 

Understanding more about 401(k) accounts and how they operate is the key to making them work for you. Anytime you switch employers you should always consider what you want to do with your existing 401(k). Be sure to assess your options above and make the best choice depending on your situation.

This Is Why Your Employer Should Offer a 401(k)

Offering a 401(k) has now become standard practice for many businesses, regardless of what size they are. As employees start to realize the many advantages that 401(k) plans have over other types of retirement savings accounts, they are factoring the availability of one through employer benefits when deciding on which job they would like to take. Business owners are realizing this shift in need from employees and have indulged in creating 401(k) plans as they provide many benefits for the business as well. Let’s see what some of these benefits are below. 

Business Tax Savings 

Businesses can experience tax savings from offering 401(k) plans in three different ways. These include the EGTRRA Tax Credit, contributions tax deduction, and reduction of payroll taxes due annually. Let’s take a look at how each one of these tax savings work.

First, we have the EGTRAA tax deduction, which stands for Economic Growth and Tax Relief and Reconciliation Act. This allows small businesses an annual total tax credit of up to $500 for the first three years of instituting a retirement savings plan. The tax credit is equal to 50 percent of the cost of creating and administering a 401(k) savings plan. Only small businesses with less than 100 employees qualify for this tax credit. 

When a business decides to contribute to their employees 401(k) plans, they immediately qualify for a tax deduction. All the contributions that are made throughout the year can be deducted up to applicable limits. Lastly, when employees make contributions to their 401(k) plan, it’s from their before-tax income. This means the salary listed on the payroll sheet for the business will display the amount the employee made after their 401(k) contributions. This could potentially translate to a reduction in payroll taxes due annually.

Employee Recruitment And Retention 

In most situations, employees have many options when it comes to finding a job they want. This has led more employers to come up with great benefits to successfully recruit experienced staff. Having an established 401(k) retirement savings plan is a must for any business that wants to recruit and retain productive and knowledgeable employees. 

More Affordable Than Ever Before 

As employee pension plans are finally phasing out, the 401(k) is becoming the most popular form of retirement investing. This means that more affordable options are coming out to business owners who are looking to institute this type of employee benefit. No longer do business owners need to struggle with paying tons of money to financial advisors. Now, they can simply design and maintain 401(k) plans for their employees through simple web-based applications. 

As you can see, there are many reasons why business owners should seriously be thinking about offering their employees a 401(k) plan. These are not just great for the employees, but they are fantastic for the employers as well. We highly encourage any business owners out there who are not currently offering this type of retirement program to seriously look into doing so