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Self Directed 401(k) Rollover

A Self directed 401(k) rollover is a transfer of funds from your existing retirement account to your new self directed 401(k) account. There are two ways to accomplish a self directed 401(k) rollover:

  1. Direct Rollover
  2. Traditional Rollover

Direct Rollover: In the case of a direct rollover to a self directed 401(k) account the money held in the investor’s retirement account is directly transferred to the self-directed 401(k) retirement account. The funds will not pass through the investor. This method of rollover is very efficient and quick. No withholding taxes apply in case of a direct rollover.

Traditional Rollover: If an investor opts for a traditional rollover to the self directed 401(k) account the funds will be first transferred to the bank account of the investor from the existing retirement account. The investor is then responsible to transfer the funds within 60 days to the new self directed 401(k) account. The investor can instruct the existing custodian/administrator to withhold taxes to a certain percentage or withhold nothing at all. In the case where the investor receives funds net of withholding taxes he can claim the refund of the withholding tax once he files the tax return for the year.

If the investor fails to execute the transfer of funds to the self directed 401(k) account within the mandated 60 days it will be treated as a distribution, and would be eligible for taxes and penalty. The withholding tax which is typical 20 percent would not be refunded in such a scenario.

Reasons to opt for a self directed 401(k) rollover:

If you transition from an employee to a small business owner, it makes sense for you to transfer the money from the traditional 401(k) plan of your previous employer to a new self directed 401(k) plan. Your small business cannot have any employees except for your spouse. Even though it is called a Solo K, a spouse can be a plan participant. This allows the spouse to also rollover their previous retirement funds creating a larger pool of funds for investment. These funds can be used in the same investments.

There are several advantages of a self-directed 401(k):

  • If you rollover your money from into a self-directed 401(k) you gain greater control and wider choice of investment options. Take real estate for an example – you have spotted a great real estate investment opportunity which you think is going to offer you above normal returns. With the greater control you now have, you can act immediately, write a check and not miss out. Your previous 401 k would not have allowed such an investment.
  • Another great part of a self-directed 401(k) is that it allows a higher contribution limit. As of 2018, the owner of the small business can act as both employer and employee. Hence the profit sharing and the elective employee deferral contribution together can be as high as $55,000 for business owners aged less than 50 and $61,000 for business owners age 50 and up. Remember the spouse? – they also can use elective deferral and profit sharing for an additional $55,000 or $61,000. Think of the effect this has upon the small business taxes and you can see how big this is!

Let’s use a very common scenario: Mr. and Mrs. Smith are employees of their respective companies and contribute to the company sponsored 401 k plans. Mr. Smith has a weekend consulting business without employees. This allows Self Directed Retirement Plans to create a new self directed 401 k plan with Mr. and Mrs. Smith as participants. This allows them to shelter income from their self-employment by contributing to their self-directed plan. Of course they must be aware of total contribution limits for both their company plan and their personal plan.

Another scenario: Some company 401 k plans allow for “in service transfers”. Using Mr. and Mrs. Smith again, if their company plans do allow for “in service transfers”, they can transfer money from their more restrictive company plan into their “open” plan.

At Self Directed Retirement Plans we take the time to ask the right questions. Too many people who would benefit from a self directed 401 k settle for a self directed IRA because the firms they contact promote the IRA and don’t understand self directed 401 k’s.