Teaching Kids to Be Responsible with Money

Including a Self-Directed IRA in a 401(k) Rollover

by Ian Wallace

Individual retirement account options are not necessarily limited to traditional financial assets. Individuals planning for retirement can diversify their tax-advantaged investments by rolling over a portion of their 401(k) account to a self-directed IRA.

Most IRAs are invested in relatively safe financial assets such as stock mutual funds. Over the years, the broad mix of stocks held by a mutual fund tends to provide a more consistent performance than owning stock in just a few companies. Of course, the stock of some specific companies always outperforms the market average. The price of other types of assets, however, may rise or fall independently of the stock market.

Alternative asset categories

A self-directed IRA differs from a regular IRA in that the trustee of the self-directed IRA invests in alternative assets, such as real estate or precious metals. Although alternative assets provide the potential for above-average gains, they also carry a risk of price declines. A prudent approach to investing in alternative assets is to include them as a relatively small percentage of your retirement portfolio.

Practicality of gold

The market price for gold is always easily accessible, making gold a popular alternative asset. The holder of a self-directed IRA with ownership in gold does not actually possess the metal itself. IRS regulations require the physical gold to remain under control of the sponsoring trustee. Only the most highly refined gold bullion qualifies for inclusion in a self-directed IRA, as well as certain gold coins.

Self-directed IRAs can be either traditional or Roth types. The tax-deferred status of a 401(k) account balance is maintained by rolling it over into a traditional IRA. Distributions are then taxed when eventually withdrawn. Alternatively, a 401(k) rollover to a Roth IRA is taxable. However, future withdrawals are generally not taxed, including any increases in the price of gold held in a self-directed Roth IRA.

Rollover allocations

Like a regular IRA, a self-directed IRA can be funded from either your current earnings or through a rollover. There is an annual limit on IRA contributions made from current earnings, but that limitation has no direct effect on rollover planning. If your plan allows it, you may roll over any portion of your existing 401(k) balance to a self-directed IRA and roll over the remaining portion to a regular IRA.

In addition to precious metals, several other alternative asset types can be included in a self-directed IRA. Contact a financial planner for more information about 401(k) rollovers or self-directed IRAs.