Dear Liz: My 401(k) plan has grown exceptionally well this year. I think we all know that it can’t last. I just recently heard about self-directed IRAs. I was intrigued at the possibility of opening one by rolling over a portion of my 401(k) money directly. The problem is, my company’s 401(k) provider will not allow the direct rollover of funds. Is there an alternative means of withdrawing 401(k) funds without penalty and still get them into a self-directed IRA?
Answer: You can quit your job. Otherwise, withdrawals while you’re still employed with your company will trigger taxes and probably penalties.
Your premise for wanting to open a self-directed IRA is a bit misguided, in any case. Your 401(k) balance may occasionally drop because of fluctuations in your stock and bond markets, but over the long term you should see growth.
You may have been sold on the idea that self-directed IRAs would somehow be less risky. Some companies promote self-directed IRAs as a way to invest in real estate, precious metals or other investments not commonly available in 401(k) plans. The fees these companies charge as custodians for such accounts are usually much higher than what they could charge as traditional IRA custodians, so they have a pretty powerful incentive for talking you into transferring your money to them.
The problem is that you could wind up less diversified, and therefore in a riskier position, if you dump a lot of your retirement money into any alternative investment. It’s one thing for a wealthy investor to have a self-directed IRA that invests in mortgages or gold, assuming that he or she has plenty of money in more traditional investments. It’s quite another if all you have is your 401(k) and you’re putting much more than 10% into a single investment.
Also, there’s a lot less regulation and scrutiny with self-directed IRAs than with 401(k)s, which increases the possibility of fraud. (Southern California investors may remember First Pension Corp. of Irvine, a self-directed IRA administrator that turned out to be a Ponzi scheme.) So you’d need to pick your custodian, and your investments, carefully. You also would need to understand the IRS rules for such accounts, because certain investments — such as buying real estate or other property for your own use — aren’t allowed.
If you’re determined to diversify your investments in ways your current 401(k) doesn’t allow, you can open a regular IRA at any brokerage and select from a wider variety of investment options. Or you can look for a self-directed IRA option with low minimum investment requirements to start.
Today’s top story: Hidden taxes that can bust your budget. Also in the news: how to job hunt during the holidays, the fastest growing jobs in America, and how to make the most out of your year end charitable giving.
Hidden Taxes That Can Bust Your Budget
How to avoid being caught by surprise.
3 Holiday Job Hunting Tips
Turn a holiday party into a networking event.
7 fastest-growing jobs in America
Find out which jobs are in demand.
Make the most of charitable giving and tax breaks
Do your homework before donating.
6 ways to avoid a holiday spending hangover
3 key components: a plan, a budget, and some discipline.
Today’s top story: How driving could affect your credit. Also in the news: The five C’s of credit, what you shouldn’t do this Christmas, and what we can learn about personal finance from three holiday classics.
How Does Driving Affect Your Credit?
Unpaid tickets could wreck your credit score.
The 4 Judgments Every Lender Makes Based on Your Credit
Introducing the five C’s of credit.
Essential Personal Finance Lessons From Three Holiday Classics
Kevin McAllister, coupon king.
Ten financial don’ts this Christmas
Advice from the experts on what you shouldn’t do this Christmas.
Everything I’ve Learned About Personal Finance in 10 Sentences
Short and sweet advice.
Donna Freedman was kind enough to include a couple of my books in her recent post, “The gift of personal finance,” which made me realize that there was an unusually good crop of money tomes that appeared this year.
I’m delighted to recommend the following for anyone who’s interested in making the most of his or her money:
Today’s top story: Mythbusting your FICO score. Also in the news: Steps retiring entrepreneurs should take, tax moves Boomers should make right away, and how retailers trick you into spending money.
5 Myths About Late Payments & Your FICO Scores
Mythbusting, FICO style.
10 Steps for Retiring Entrepreneurs
Using your company as a cash cow for retirement.
Tax Moves Boomers Should Make Now
Especially those on fixed incomes.
10 Retail Tricks That Make You Spend More
Reminder: Retailers are not your friend.
Ginormous Hack Targets 2 Million Accounts Spread 93,000 Websites Worldwide
Keep an eye on your email and social media accounts.
Today’s top story: Should real estate be a part of your retirement plan? Also in the news: How to avoid resetting the mortgage clock, finding the right financial advisor, and how to manage erratic prescription drug costs.
How Real Estate Fits Into Your Retirement
The risks and rewards of including real estate in your retirement plan.
How to Refinance Without Resetting the Mortgage Clock
Don’t turn the clock back 30 years.
5 Questions to Ask a Potential Financial Advisor
Making sure you find the right person to serve your financial interests.
The Zig-Zag Pricing of Prescription Drugs
What to do with erratic prescription costs.
Are credit cards more expensive now?
How did the CARD Act affect what’s in your wallet?
Dear Liz: We took a home equity loan against our house to open a business in 2006. We also ran up credit card debt for the business. The business went under, and we’re struggling to pay off the loan, which is $150,000 (a $1,150 payment every month), and the credit card debt, which we got down to about $20,000 from $37,000. Is there any way to get relief from the loan since it was a legitimate business (a franchise we bought from another franchisee)? We don’t know what to do and have been taking money out of our savings to pay the debt.
Answer: Your home equity lender doesn’t care whether you spent the money on a “legitimate business” or an around-the-world cruise. The lender expects to get paid, and chances are it will, since you secured the loan with your house. Failing to pay a home equity loan can trigger a foreclosure.
If you have equity in your home, you may be able to do a cash-out refinance of your current mortgage to pay off the loan. You’d wind up with a bigger primary mortgage, but a longer payback period and a lower interest rate should reduce your total debt payments. Another option is to sell your home to pay off the debt so you can start over.
What you shouldn’t do is dip into your savings without a real strategy for resolving this debt. A session with a fee-only financial planner could help you understand your options. The planner also may suggest a consultation with a bankruptcy attorney.
Today’s top story: Compiling your year-end tax list. Also in the news: What high schoolers need to know about personal finance, smart money moves for uncertain times, and what hip hop can teach us about finance.
Your Year-End Tax To-Do List
It’s not too late to add deductions.
What Do High Schoolers Need to Know About Personal Finance?
More than you’d think.
4 Smart Personal-Finance Moves for Treacherous Times
Preparing for possible impending doom.
10 Personal Finance Tips From Hip-Hop Lyrics
No, you’re not hallucinating.
5 Steps to Consider if You Can’t Afford to Retire
Whatever you do, don’t panic.