How to Transfer My 401(k) to a Self Directed IRA

Self-directed IRAs increase your investment options, but can be riskier than traditional IRAs.
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You can transfer or roll over your 401(k) funds to a self-directed IRA if you separate from your employer due to retirement, termination, or simply quitting your job. You can transfer the funds just like you would to another 401(k) or a traditional IRA. The difference is, you use a specialized IRA, which allows you to invest in instruments other than stocks, bonds and mutual funds.

Self-Directed IRAs

A self-directed IRA provides you the same tax advantages as a traditional Individual Retirement Account. However, instead of directing your money into stocks, bonds or mutual funds, you can choose just about any type of investment, including real estate, tax liens or storage facilities. Typically, these types of accounts are set up and administered through custodian and trust banks that specialize in self-directed IRAs -- not traditional banks and brokerages.

Investment Limitations

While these accounts offer more investment options than traditional IRAs, the self-directed IRA has a few limitations on how you can invest your money. This means you can't invest the money in items used for personal pleasure or consumption, like wine cellars, collectibles, life insurance plans and tangible personal property for your own use. Also, you cannot use the funds to set up your family members in a new home or business. Finally, you can't loan yourself money or use the funds as collateral for a loan. Otherwise, just about any other real estate or business venture qualifies.

Direct Rollover

Once you separate from your employer and have the right to distribute your 401(k) funds, you can open an account with a company that offers self-directed IRAs and transfer the funds from the 401(k) to the self-directed IRA. A trustee-to-trustee transfer, or direct rollover, is the easiest and safest way to transfer the funds without losing any of the tax benefits of a qualified retirement plan. Contact your 401(k) plan administrator for all the applicable paperwork, fill it out, send it in, and then wait for the funds to roll over to the new plan. This can take a few days to several weeks, depending on the company managing the 401(k).

Other Concerns

You can also have the funds sent directly to you and make the deposit yourself, but if you don't do so within 60 days, you'll pay ordinary income taxes and a 10 percent penalty on the distributed funds. In some cases, you may also run into restrictions set by your 401(k). The plan may have a certain time frame for valuing your account, which can delay your access to the funds. Or, you may be due an employee match that you'll miss out on if you roll the funds too quickly. Your 401(k) administrator can provide you this information.

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