Steps For Rolling Over Existing Accounts Into A Self-Directed IRA

As people work their way through one or more careers, and have several (if not dozens) of jobs, they can easily accumulate multiple retirement accounts. They generally come in the form of 401(k) accounts at past employers, traditional IRAs, Roth IRAs, and perhaps even employer pension plans (although this last type of benefit is becoming increasingly rare).

Unfortunately, it can often become quite an administrative burden to manage so many different accounts. For some individuals it can be challenging enough trying to come up with the time to review the monthly or quarterly statements from a single retirement account. Trying to do so for a half-dozen or more accounts can quickly become nearly impossible.

The best way to clear up this administrative nightmare is to roll over all of your existing accounts, including accounts from prior employers, into a single self-directed IRA. Here are the steps for doing so.

1. Identify Your Target Account.
If you don’t currently have a self-directed IRA, then you’ll need to set one up before you go any further. Requesting a rollover from a prior 401(k) or a current IRA, but not having a target account in place, can result in the other plan administrator sending you a check for your account balance. If you don’t deposit this check quickly enough, the IRS may consider it a taxable distribution, and the cost to you could be significant.

The better path forward is to have your self-directed IRA already in place, and request that your current custodian or plan administrator send your rollover proceeds directly to the new account.

2. Contact Your Prior and Current Account Administrators. Once you have a self-directed IRA set up, it’s time to contact each of your current and prior account custodians and administrators. When attempting a rollover of a 401(k) from a prior employer, you may need to begin the process by contacting the employer first; and if you don’t know where to begin, start with the HR or benefits department.

Have all the information regarding your new account ready to give the prior administrators, and be prepared to follow-up if the rollover doesn’t occur within the timeframe they specify. Some plans will give you the choice of liquidating your account and doing a rollover of the proceeds, or rolling over the investment positions themselves, while other plans will automatically liquidate your investments and do a rollover of cash. If you have the choice, make sure to do your research on what’s best for you.

3. Consider Your Next Investment Steps. As you may already know, self-directed IRAs provide significantly more investment options than traditional IRAs or 401(k)s, so it might seem a little overwhelming. You can use a self-directed IRA to invest in real estate, certain types of precious metals, private companies, private mortgages, and many other investment classes that almost certainly weren’t available with your prior retirement plans.

Exploring investment possibilities while the rollovers are occurring will give you the confidence to proceed with your retirement investing plan once the rollover funds are in your new account.

How a Change of Career Can Impact Your Self-Directed IRA

The process of building up a retirement nest egg doesn’t occur in a vacuum. You can come up with a savings plan and investment plan, but if the other financial elements of your life undergo significant changes, you might have to adjust those plans. One thing that can impact your self-directed IRA in several important ways is changing your job or career.

New Income Levels

As you are likely already aware, your ability to contribute to a traditional self-directed IRA or a Roth self-directed will depend on your modified adjusted gross income, as well as whether you’re participating in an employer-sponsored retirement plan such as a 401(k).

For 2021, for example, if you’re a single taxpayer and you’re covered by a retirement plan at work, you can only deduct the full amount of any contributions you make to a traditional self-directed IRA if your modified gross income is $66,000 or less. With respect to a Roth self-directed IRA it is irrelevant whether or not you participate in an employer-sponsored retirement plan, but you can only make the maximum contribution to your Roth account if your modified adjusted gross income is less than $125,000.

Clearly there are several moving parts here, but the bottom line is that whenever you switch to a new career or job, the optimal contribution strategy you used in past years may not be the best one in your new position. You may find that you’re much better off making contributions to a traditional account than a Roth account, or vice versa. (And some individuals maintain both Roth and traditional IRAs throughout their saving years for just this reason.)

Ability to Rollover Your 401(k) Account

Whenever you change jobs, you have the ability to roll over your account balance to your new 401(k) account at your new employer (assuming that your new employer offers such a plan). That has certainly been a common approach among many individuals who find themselves moving to a new job or new career.

But that change in job or career gives an opportunity to rollover the balance that’s in your 401(k) account into your self-directed IRA. Not only will this give you the opportunity to reduce your administrative burden by having fewer accounts to manage, but you’ll also have a larger pool of capital that you can use to make some of the less common retirement investments that you can only do with a self-directed IRA.

It’s true that you can generally leave your 401(k) account with your old employer, but if you choose that path you won’t be able to make new contributions to your account, and you’ll be stuck with whatever limited investment options that particular plan happens to offer.

Make sure that you structure this as a direct rollover, not as a distribution and contribution of funds. The negative tax implications of taking a distribution from your 401(k) could be significant.