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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.

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Categories : Q&A, Retirement

5 Comments

1

Was going to add that the phrase “I think we all know that it can’t last” is a fear-guided market-timing statement. In other words, don’t let emotion (greed/fear) drive your decisions, and beware of any thought that be paraphrased as “I think I can time the market”, or “I’m trying to time the market”.

Self-awareness on these two issues is worth a lot of money in the long-term.

2

Liz,

You are correct on the risk assumptions, however, self-directed IRA’s deserve a better look through the flexibility of assets that may be acquired. Leaving the money in equity funds may indeed be more risky in this toppy/wonky market place where individuals in the know may be able to make impressive real estate investments if they could only access money from a 401k to do so. The self directed option appears to offer this, and this topic will only continue to grow as people start looking for smarter ways to invest their money instead of putting third parties in the stock market essentially in charge.

3

Well said.

4

[…] there a way to protect the growth on a 401K? From your post, it doesn’t appear that there is. It appears that the initial investment along with any […]

5

Thanks Liz