Move Money to an IRA from a 401k
Knowing when to Transfer Retirement Funds to a Self Directed IRA
Dec 4, 2008
Retirees are concerned about what to do with their 401(k)s left at their places of employment when they retired. They may have seen those retirement accounts drop in value since their retirement date. Another group wondering what to do with old 401(k)s is workers who have been laid-off. They may have left behind retirement accounts that, like retirees, they are concerned about. Not only are these ex-employees concerned about the value of their 401(k)s, but they are also concerned about whether their former companies are stable.
You should not move money from your 401(k) when the value of your investments has dropped unless it is absolutely necessary or there is evidence the value may drop further and stay down for a long period of time. However, if you are a retiree, you may need to tap money from your 401(k) for living expenses or medical bills. The same is true if you have recently been laid off.
What is a Self-Directed IRA?
A self-directed IRA is no different from any other IRA except that you direct your investments. You are allowed a variety of investments within your IRA. Along with the regular stocks, bonds, and annuities, you can also invest in real estate, private notes and loans, limited liability corporations, and other investments. Banks, insurance companies, and brokerages can help you set up your self-directed IRA. If you want to buy real estate through your IRA, you will need to find an independent administrator to serve as your custodian.
Why Roll over Your Retirement Funds?
Rolling over the retirement funds from your 401(k) will allow your money to continue to grow tax-deferred until you withdraw it. If you rollover the money to an IRA, you usually have more investment choices than if you leave it in the 401(k). If you were to withdraw the money from your 401(k), you would take a large and an unnecessary tax hit immediately.
What are the Advantages of a Self-Directed IRA?
By rolling over your retirement funds to a self-directed IRA, you can get out of whatever funds or fund you’ve been stuck with in your 401(k) and have other options in which to invest your money. If you are looking for options with less risk such as money market funds or certificates of deposit, then you can invest in those options. If you would like to take on more risk, such as real estate, that is open to you as well. You also preserve all of your tax benefits when you roll your money into a self-directed IRA. As long as you are older than 59 ½, you can request a check from your IRA at any time or set up a regular monthly withdrawal though you don’t have to start taking withdrawals until you are 70 years old.
What are the Disadvantages of a Self-Directed IRA?
The major disadvantage of moving your money from a 401(k) to an IRA is that you cannot borrow money from an IRA and you can from a 401(k).
If you are retired or have been laid off by your employer, consider rolling over your 401(k) to a self-directed IRA. You will have control over your retirement money and a variety of investments to choose from. Don’t roll over your investments, however, if their value is much lower than the cost at which you bought them. Wait until the value comes back up. Here are some handy tips to manage your 401(k) while you’re waiting to roll it over.
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