May 17, 2023

The Quick Guide to Funding a Self-Directed IRA with Your 401(k)

Written By: Daniel Gleich

Key Points 

  • You can roll over funds from your 401(k) to a new Self-Directed IRA.

  • A rollover can be direct or indirect.

  • If the rollover is indirect, you will have 60 days from the date of your 401(k) distribution to deposit the funds into your new Self-Directed IRA.

Opening a Self-Directed IRA marks an exciting step toward gaining greater control of how you save for retirement. Instead of being limited to stocks, bonds and mutual funds, you’ll be able to invest in real estate as well as private businesses, precious metals and more—but before you invest, you’ll need to fund your account.  

One of the most common and convenient ways to fund a Self-Directed IRA is through an existing 401(k). In this article, you will learn how to seamlessly move your 401(k) funds to your Self-Directed IRA. 

IRA Rollover

A rollover allows you to move funds between two different types of retirement accounts, such as a 401(k) and a Self-Directed IRA. It’s a withdrawal from your current retirement account, and the same amount of funds must be deposited into a new or different retirement account. When completed correctly, a Self-Directed IRA rollover from a 401(k) does not incur taxes. There are two different types of rollovers that we’ll explain shortly, but first, we’ll discuss the difference between a rollover and a transfer.

IRA Rollover vs. Transfer: What's the Difference?

On the surface, a rollover may sound a lot like a transfer. At the end of the day, you’re moving money. However, a rollover and transfer are markedly different and it’s important to understand why that’s the case. 

A transfer is the movement of funds between two similar retirement accounts. Since a Self-Directed IRAs is a type of IRA, the option to transfer is in play. The funds are transferred directly from an IRA at one financial institution to an IRA at another, without the funds passing through the hands of the IRA account holder. 

The difference between an IRA transfer and an IRA rollover.

A rollover requires reporting to the IRS as you’re moving money between two different types of retirement accounts and there may be a temporary distribution involved. The institution sending the funds will file IRS Form 1099-R. The institution receiving the funds will file IRS Form 5498. The account holder will have to properly note the rollover on their tax return. Meanwhile, a transfer does not require any IRS reporting because the funds are moved between two similar retirement accounts and no distribution takes place.

Direct IRA Rollover

When rolling over funds from a 401(k) to a Self-Directed IRA, you can choose between a direct rollover and an indirect rollover. A direct rollover occurs when the funds are moved directly from your existing retirement account into your new Self-Directed IRA. You will initiate your rollover with your previous financial institution and complete the required paperwork to roll over your funds to your new custodian, in turn funding your Self-Directed IRA.

Indirect IRA Rollover

In an indirect rollover, the funds are first distributed to you, the account holder. You will then have 60 days to place the funds in your Self-Directed IRA.  

It's important to note that an indirect rollover may trigger tax withholding, which means that your Plan Administrator is required to withhold a portion of the distribution and send it directly to the IRS on your behalf. The tax withholding rate for indirect rollovers is typically 20%. The account owner receives a check for the other 80% to be deposited into their new IRA within 60 days to avoid taxes. 

The tax withholding rate for an indirect rollover can vary based on the type of distribution and your tax bracket. Also keep in mind that you can only make one indirect rollover per year between all of your IRAs.

Direct IRA Rollover vs. Indirect IRA Rollover: Which is Better?

Each person’s financial situation is unique and there are many different factors to consider before choosing how to move funds from your current IRA to a new Self-Directed IRA. As a Self-Directed IRA custodian, we’re here to educate you about how Self-Directed IRAs function so you can decide what’s right for you. For a deeper dive on Self-Directed IRA rollovers, transfers and other useful information, download our complete Self-Directed IRA Rollover Guide.

Do you have questions about rolling over funds into your Self-Directed IRA?

We have answers! Schedule a Call with a Self-Directed IRA Specialist today.

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax, or investment advice. Nothing of the foregoing, or of any other written, electronic or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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