By: Daniel Gleich
Key Points
- While most 401(k) plans stemming from current employers are usually incapable of being rolled over, there are some occurrences where it’s allowed.
- When rolling over your 401(k) to a Self-Directed IRA (SDIRA) you should begin by confirming its eligible for this process.
- Account holders may also need to hold certain conditions. It’s considered best practice to familiarize yourself with said restrictions prior to attempting a rollover.
If you’re looking to expand your retirement portfolio beyond Wall Street, you may be considering rolling over your 401(k) to a Self-Directed IRA or SDIRA. Generally, employees can’t take money out of their 401(k)s while still earning a salary from said employer. Nevertheless, there are some qualifying exceptions.
The Illustrious In-Service Rollovers
In-service rollovers enable 401(k) holders to transfer funds or assets from your current employer’s plan to a Self-Directed IRA. This transaction is usually sought by investors who want a broader scope of investments to choose from. Simultaneously, they tend to also want more sovereignty over their retirement savings.
This may lead you to the follow-up question: how do I know if my employer allows in-service rollovers?
Reviewing Plan Documents
Examine your 401(k)’s Summary Plan Description and any other relevant plan documents. You should find a section outlining the rules specifically around rollovers and distributions. This should mention in-service rollovers if they’re allowed.
Speaking With Your Plan Administrator
If you’re having difficulty finding the necessary information and in need of further clarification, contacting your current plan administrator directly can prove to be helpful. They should be able to provide you with accurate information detailing your plan’s specific rules.
Checking Distribution Forms
With so much information readily available online, your plan may have distribution forms accessible. These usually can give you some insight as to whether in-service rollovers are permitted.
Consulting With Human Resources
Your company’s Human Resources department should be able to elaborate on the specificities of your retirement plan.
While Rolling Over a 401(k) to a Self-Directed IRA, There May be Restraints
Learning your company offers in-service rollovers can be relieving. However, it’s critical that you ensure there are no limitations in place that could prevent you from moving forward.
Some plans require participants be 59 ½ or older to be eligible for tax-free in-service rollovers. Moreover, some of these plans demand you be in service for an allotted amount of time. (This typically is a period of two to five years.) If you were hoping to roll your 401(k) to a Self-Directed IRA in entirety, some retirement plans may only grant you the chance to rollover a selected percentage of your account balance.
What’s more, not every type of contribution is authorized for these rollover initiatives. While employer contributions (profit-sharing and matching) are often allowed, pre-tax contributions are typically only permitted once the plan holder has reached the age of 59 ½. After-tax contributions can sway in either direction, so ensuring these are eligible is also imperative.
The Significance of Account Types for a 401(k) to a Self-Directed IRA Rollover
Taking note of your 401(k) account type, as well as the type of IRA you hope to transfer your funds into is of the upmost importance. Rolling over a traditional 401(k) to a traditional Self-Directed IRA, congruent with rolling over a Roth 401(k) to a Self-Directed Roth IRA, typically bares no tax implications. The movement of money from one traditional account to another is an exchange through tax-deferred vehicles. Both accounts have yet to pay taxes on their earnings or contributions.
Roth 401(k)s to Self-Directed Roth IRAs have a similar outcome, as both accounts have their revenue develop in tax-free environments. Both accounts have been funded with after-tax dollars, resulting in no tax implications. Yet, if you’re hoping to roll over a traditional 401(k) to Self-Directed Roth IRA, taxes will likely be triggered. This is because both accounts are created under different tax advantages.
Therefore, it’s likely the amount rolled over in this scenario would be treated as taxable income for the year the rollover was performed. This may result in owing income taxes on the full amount rolled over, in addition to potentially being pushed into a higher tax bracket for the year. No matter what your rollover situation may be, you are still required to report the rollover on your tax return.
What Are the Incentives to Rolling Over My 401(k) to a Self-Directed IRA?
If you’re unaware of the plethora of benefits Self-Directed IRAs can offer, you may be pondering why your 401(k) funds are better off in a new structure. Here are some common reasons why investors opt to modify the constitution of their account.
An Entryway to Alternative Assets
Typically, SDIRAs harness a wider range of investments for the explorative investor. Particularly, those who have developed piqued interests in alternative investing. Nowadays, a retirement portfolio is usually considered undiversified if there isn’t a section designated for alternative assets. Some investors even revel in the idea of investing in a variety of asset classes to further spread their savings. (Real estate, precious metals, and startups are some examples.) This is generally an excellent tactic for potentially mitigating portfolio risk, as some of these investments have the potential for greater returns.
Getting to Govern Your Retirement
Another prime cause for investors initiating a 401(k) to a Self-Directed IRA rollover is the desire for greater control. When you’re employing a Self-Directed IRA to harbor your retirement savings, you now have the capacity to allocate your savings to wherever you feel is most beneficial for your future. Although all accounts are administered by a Self-Directed IRA custodian, their action relies on your direction. They will not perform any transactions without your instruction.
That Tantalizing Transportability
As 401(k)s are usually employee-sponsored plans, their portability is typically substantially less than that of a Self-Directed IRA. Since self-directed accounts are not tied to anything outside of yourself, a change of job or change of investment should not affect the status of your retirement account.
Acquiring Simplicity for Your Future
Some account holders may be in possession of multiple 401(k)s from previous employers. By utilizing an SDIRA, you can possibly make your retirement savings easier to manage. Flooding all your monetary resources into a self-directed account lets you transform inactive savings to ones that can diffuse across the gamut of the investing realm.
Claiming Control of Your Retirement: Turning that 401(k) into a Self-Directed IRA
At Madison Trust, we’re eager to break the stigma surrounding IRAs by teaching our clients that it’s not as complicated as you imagine. By helping you obtain self-education, you can find the self-confidence to commence your self-directing journey. Schedule a free discovery call and start writing the beginning of your investing story today.
