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Should You Roll Your 401k Balance Into a Self Directed IRA?

A Self Directed IRA Rollover Can Allow for Individual Stock Investments and Purchase of Low Cost ETF’s.

Why Should I Rollover my 401k Balance Into a Self-Directed IRA as Opposed to my new Workplace Plan? 

If you are leaving your old job and transferring to a new employer, chances are you may have accumulated a retirement plan balance (hopefully), and will need to determine what to do with that balance at some point after you leave. Typically the old plan will only allow you to leave the funds with them for a period of time before they either charge additional fees or send you a check (indicating they cannot retain your funds within their plan). You can then either roll these funds over to your new employer’s plan, or start a self directed IRA with a number of large investment brokerage houses who would be happy to open the account and offer you a wide array of investment choices. Some of these brokerages include Merrill Edge, Fidelity, T. Rowe Price.

One of the biggest questions you may have about doing so is what benefits would there be to rolling over into a self directed IRA versus putting the money into the new workplace plan? In some cases, there will be little difference (as some plans offer their employees a wide array of investment options including individual stocks, and etf’s within their plans). However, in other cases, there is a large difference as the new employer plan may offer very limited investment choices (a handful of funds to choose from which may charge excessive or low maintenance fees). Although sometimes it can make life easier to consolidate financial accounts, the choice of rolling over into a self directed IRA is not one that should be overlooked. A self directed IRA allows one to invest in individual stocks and ETF’s, thus a wide array of investment options with varying amounts of risk and varying fees. However, if your new plan is restrictive and only has funds with higher annual maintenance fees or not a great track record of past success in terms of annual returns, a self directed IRA would fix this.

What You Need to Know about Rollovers
An IRA-to-IRA rollover occurs when you take an IRA distribution in your personal possession and deposit the funds and/or assets back into the same type of IRA within 60 days of the date from which you received the funds. Returning the funds back to the same type of IRA allows you to avoid tax on the distribution and a 10% penalty tax. These will commonly need to be completed upon leaving a job or transferring from one company to another. Your old plan will typically allow a period of time where you may retain the funds with them, after that you will need to move it or possibly incur additional fees, eating up your account equity. You will then have the option of rolling over your old 401k or IRA to your new employer’s plan, or you can roll your 401k over into a self directed IRA.

Rollover IRA – 3 Easy Steps
Rolling over a previous 401(k) or existing IRA to a self-directed IRA.

  • Open a Self-Directed IRA,
  • Rollover your IRAs to the newly opened account,
  • Choose your investments.

 

When does the 60-day period begin?

Generally, a rollover of cash or other assets from one retirement account to another is a tax-free distribution to you as long as you deposit the cash and assets distributed into another IRA. This type of deposit is considered a contribution or you may have heard this called a “rollover contribution.”

The rollover contribution must be deposited into the IRA by the 60th day after the day you receive the distribution from your IRA or your employer’s plan. The day following the day of receipt is considered day one. There are no rules with the IRS granting an extension of the 60-day period if the 60th day falls on a Saturday, Sunday, or legal holiday. It is safest to count sixty calendar days from the time you receive the funds and assume there are no exceptions to which the 60th day falls. Generally you will want to simply complete the transfer as soon as possible to leave nothing to chance. You don’t want to be in a position where you are disputing the IRS as to the 60 day window.

Remember: The date the funds were disbursed and sent from the IRA does not start the 60 day period. It starts on the 60-day period. If the rollover is not completed within 60 days, the portion of the distribution not deposited into an IRA must be reported as income for the calendar year in which the distribution occurred.

What type of tax forms will I receive when I do a rollover?

A 1099 tax form is issued for the distribution and the receiving institution reports the rollover on a 5498 tax form. If the rollover is less than the original distribution amount, you must report the difference as part of your federal tax return. Funds that are not deposited into an IRA as a contribution are considered income. Taxes and penalties may occur if you do not meet the distribution requirements for the type of IRA you hold.

 

How many times can I do a rollover for my IRA funds/assets?

You are allowed to do one rollover per 12-month period per IRA. The 12-month period begins on the date you receive the funds/assets, not the date the funds/assets were sent to you from your IRA custodian. The 12-month period does not start on the date you return the funds/assets back to the IRA as a contribution.

If a second distribution is made during the 12-month period it will not be eligible for rollover. This means the distribution is a taxable event and is subject to the 10% penalty tax, if applicable. In addition those funds are invalid to deposit to the account as a rollover contribution. They will be treated as a regular contribution for the current year, which result in an excess contribution.

Conclusion: 

A self directed IRA is a good option when leaving a prior job and should not be overlooked. Rolling over into a self directed IRA would maintain the tax free status for the period with which you are investing and growing said funds (prior to having to withdrawal funds at 70 1/2 years of age (or upon retirement). Rolling into a self directed IRA would also provide a broad range of investment choices if you chose to do so with one of the large brokerage firms which offer a self directed IRA. This can be a very important reason for rolling your funds into a self directed IRA as you may very well want to invest in individual stocks (in a tax deferred retirement account) allowing for a higher risk/higher reward scenario, or simply want the choice of investing in more low cost funds or low cost ETF’s (which you do not have the ability to do in your new plan).

 

 

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