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Your 401(k) Rollover Options |
Now more than ever, employers are offering lower and lower matches, and investing in only the safest mutual and index funds available. And while these proven investment practices may
strengthen your plan against most market pitfalls, the returns are minimal, and can take too many years to mature enough to allow for a timely and comfortable retirement. These conditions are prompting more and more people to consider
other forms of investing in an effort to increase their returns and provide for a more financially secure future. The following four options are available to anyone who wants to explore the ways in which they can maximize the earnings of
their retirement plan:A. Rollover into your New Employer's PlanThe Advantage here is primarily lower chances of losses because most companies invest conservatively. There is rarely a minimum investment requirement, and most companys' plans allow some flexibility in how you choose to distribute your money among the funds offered in your new plan.The Downside generally includes lower returns on your investment dollar, and the fact that your investment options are restricted to those offered by your new employer. And if your new company isn't very big, you can also expect to pay higher fees. B. Rollover Into a Brokerage IRAThe Advantage here is flexibility and room for diversification. Whereas a 401(k) confines you to mutual and index funds, a brokerage IRA account allows you to invest in ETFs, or exchange traded funds, which are well suited to most retirement plans. With no minimum investment required, these are traded like stock and can be used to buy into other stocks, mutual funds, bonds and even CDs. They are easily set up at any bank or financial institution, and with thousands of investment options to choose from, many discount brokers will charge little or no commissions at all.The Downside is that there are a brokers' fees each time you make a trade, and if you choose to invest in ETFs, there are recurring charges built in that are added to the trade commissions. C. Rollover into an IRA with a Mutual Fund CompanyThis is a popular option because it's inexpensive and offered by solid firms with substantial experience and reputations like T. Rowe Price, Charles Schwab, Vanguard, Fidelity, etc.The Advantage to working with a mutual fund company is that there are no commissions and, in most cases, no account fees when you meet basic requirements. There is also the assurance in knowing that your investments are being handled by experts with proven records of consistently sound investing. The Downside is that not unlike your employer's plan, your investment options are limited to what the fund company offers, and most don't permit investing in individual stocks or ETFs. There are also minimum investment requirements, usually from $500 to $3,000 per fund, before you can begin buying any shares. D. Rollover into a Self-Directed IRAAlso known as IRA LLCs, this is quickly becoming the ideal option for many in a period that suffers continually from market failures, bubbles and bursts. This form of IRA gives complete control to the holder and allows investment in real tangible assets like:
The Downside is that self directed IRAs cannot be used to buy life insurance or collectibles, and IRS Code section 4975 prohibits any form of self-dealing, like purchasing property from yourself, or in any way benefitting from the property you own. An example would be someone that invests in land and uses it to race motorcycles and ATV's on. |
 The Rollover Process |
While the paperwork might seem a bit complicated at first, it's actually a fairly simple and straight-forward process when you follow these steps:1. Confirm your Employment StatusWhile the people in your Human Resources department will be most helpful in sending you off in the right direction, they have been known to neglect informing your Plan Provider of your termination, which often results in delays, additional fees, restrictions or disqualifications before anyone catches the error. So save a little time, money and frustration by confirming this condition before proceeding.2. Contact your Current ProviderConfirm your eligibility to transfer the money to your new plan, and request any forms needed to initiate the transfer. In some cases all that's required is a simple Rollover Request Form from your new provider.3. Contact your New ProviderDepending on the form of your old plan, whether a new 401(k) plan, Brokerage Account or Mutual Fund Company, you will either be required to first open an account, and then submit a Rollover Request Form or, as in most cases today, the funds are electronically transferred when the new account is created.4. Complete All Forms CarefullyIt's important to indicate at the outset that the type of distribution you're requesting is a Direct Rollover so that the transfer of funds is made payable directly to your new account. It is not recommended for unqualified people to do this on their own. Simple errors and incorrect or inaccurate information can result in any number of costly and time consuming problems.5. Follow UpIt's important at this point to stay on top of the process. It is not uncommon at all for old providers to resist transferring the funds, and they will almost never alert you to any errors or obstacles in a timely fashion; it should never take more than 2 weeks to complete the entire process. |
The Self Directed IRA (LLC) |
| Welcome to the world of checkbook investing. By setting up a Self-Directed IRA, you can invest in tangible assets like precious metals and property, or private businesses, even foreign
currencies and stock markets. It's this kind of IRA that allowed a lot of people to make a lot of money these past 15 years or so flipping properties. But those individuals savvy enough to purchase carefully selected, pre-developed land
during this period were the top earners in real estate, earning as little as 20% per year, or as much as 40%, and more! Think about that for a moment. Those that weren't overly successfull at purchasing the best pieces of land were
doubling their money every 5 years or so, while those that paid the closest attention to trends, indicators, forecasts, and state and city planning projections, were becoming wealthy. And all without having to contend with tenants or
property maintenance.
Well that bubble's burst. Which is good news for people with relatively new to moderately mature retirement plans. Until recently most investors in pre-developed land were very happy doubling their money every few years, but land banking is most profitable when the property is held for longer periods of time. When you hold well-selected, pre-developed land for 15, 20, 30 years, you get rich. That's a fact. And while I'm sure you know the real estate industry hasn't stopped falling since 2007 (and may take longer to recover than most people hope) you might just want to consider the first rule of investing: Buy low, sell high. Any self directed IRA must be set up properly, and should be done only by an expert. Errors and improper or incomplete submissions are easily interpreted as "prohibited transactions" and can result in an IRS audit, or even disqualification. Some of the documents required are listed below, and must be worded precisely:
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Setting up an IRA (LLC) |
| 1. A Self-Directed IRA is an LLC, which means it must be registered as a business with your state's Secretary of State. The forms and information you will need
are available from your state's government website.
2. An Operating Agreement will need to be prepared that meets the requirements determined for a self-directed IRA LLC in your state. It is strongly advised this be done by an attorney. 3. Choose a Trust Company that specializes in 100%, self-directed investments by individuals or LLC companies. The Trust company will act as your initial Custodian, and will prove most valuable in assisting with the preperation of your documents. Once you have successfully established your IRA (LLC), you will no longer require a Custodian because from this point on you are your own custodian. 4. The Self-Directed IRA account is set up by transferring funds from of an existing retirement plan, an old 401k account, your current employer's plan (where permitted) or any plan that allows In-Service Distribution. 5. You will then work closely with your IRA Custodian in selecting investments with the optimum terms. Remember, this is a retirement account, so focus on long term investments that yield the highest returns. 6. Purchase the investments as a Limited Liability Company, not as an individual. Use only checks from the LLC account, and refrain from making any personal withdrawals as you will be taxed on that money. 7. Your LLC checking account can be set up at any bank, where your investment earnings are held tax deferred, until withdrawn. |
