Employer retirement plans and individual retirement accounts share a common goal: to spur you to into saving and investing for you later years. You are indeed allowed to transfer funds from an employer retirement account to a self-directed IRA, but the transfer must clear a few hurdles. Only an employer plan qualified by the Internal Revenue Service can be transferred to an IRA. These plans include 401(k)s, 403(b)s and 457s.
A custodian must administer an IRA. In many cases, the custodian limits the investments it will green light for your IRA. For example, the custodian might limit you to mutual funds sold by the custodian’s company. By contrast, the custodian of a self-directed IRA places no restrictions on the property in your IRA beyond those limits required by law. For example, you can never hold a life insurance policy in an IRA. The IRA rollover rules are the same whether or not the IRA is self-directed. The Securities and Exchange Commission warns consumers against possible fraud connected to self-directed IRAs.
Eligible Rollover Distributions
You can roll money and property from your qualified retirement plan to an IRA tax-free as long as you deposit the withdrawal within 60 days of receiving it. Your employer will withhold 20 percent of the rollover to pay taxes. You can avoid the deadline and withholding by arranging a trustee-to-trustee transfer between the employer plan and your IRA. Two sets of conditions apply to potential rollovers. First, you must be able to access your employer account money and property. If your employer agrees to giving you access, the second set of conditions curbs rollovers arising from certain situations.
Accessing Your Employer Plan
Normally, you or your beneficiaries can’t withdraw from a qualified retirement plan unless you die, become disabled, reach age 59 1/2, suffer a financial hardship or leave your job. You can also access your account if your employer shuts down the plan without replacing it, or if you are a reservist called to active duty for at least 180 days. Another way to siphon money from your employer plan is take substantially equal periodic payments for 10 years or longer. If you are younger than 59 1/2 and don’t roll over your withdrawal, you’ll have to include the amount in your current income and might have to shell out a 10 percent penalty for early withdrawal.
In most cases, you can roll into an IRA the money you can grab from your employer plan. However, the Internal Revenue Service bans rollovers stemming from required minimum distributions, substantially equal periodic payments, hardships, loans, nondeductible contributions, dividends on employer securities and the cost of life insurance included within the employer plan. Some of these withdrawals might be exempt from the early withdrawal penalty. For example, hardship distributions are exempt and include payments for certain medical costs, home purchase or repair, divorce settlements and IRS levies.
Based in Greenville SC, Eric Bank has been writing business-related articles since 1985. He holds an M.B.A. from New York University and an M.S. in finance from DePaul University. You can see samples of his work at ericbank.com.