If you’ve lost your job due to coronavirus, there’s an investing strategy for your old 401(k) funds from that employer that you should know about. There are alternatives to investing in the stock market, and many individuals invest in those assets right now. Tangible assets like real estate, private equity, and gold can be held in individual IRAs. So, you may not be working right now, but your retirement funds can continue to work for you. All you have to do is rollover that 401(k) into a self-directed traditional or Roth IRA.
Move Your Old 401(k) Funds into a Self-Directed IRA
If you’ve lost your job, your old 401(k) funds can be moved to an individual IRA—tax free—so you can continue building retirement income. Here’s how it works.
You can perform what is called a direct rollover and move your previous employer plan funds to a new plan custodian. There is no tax liability because you don’t withdraw the funds yourself. Instead, they are transferred directly from the old custodian straight into an account with the new custodian.
Now, if you move those old 401(k) funds into a self-directed IRA, you have even more options. Because these plans allow you to invest in a myriad of alternative assets that can be safer than those on the stock market.
What Is a Self-Directed IRA?
Self-directed IRAs give account owners—not the plan administrators—the freedom to choose their own assets. And, they have access to a much wider variety of investment choices. Typical IRAs and employer-sponsored plans, like your old 401(k), limit investments to stocks, bonds, and mutual funds. But a self-directed IRA can invest far beyond the boundaries of Wall Street to build retirement wealth. And, the fact that JP Morgan has made moves to raise $10 billion towards alternative assets should make you stop and think.
Self-directed IRAs are a game-changer for individuals because they can use alternative investments. And, yes, the alternative asset class is vast.
What Are Alternative Investments?
A few popular alternative investments include:
- Rental property
- Rehab and flips
- Multifamily homes
- Commercial real estate
- Private equity
- Startup companies
- Private lending
- Precious metals
These are just a few favorite choices of self-directed investors. Alternative investments are nearly endless, so it would be impossible to name them all. But, you can find a more comprehensive list in our recent blog What Are Alternative Investments for IRAs? The only assets prohibited by the IRS are life insurance and collectibles. Other than that, if you can imagine it, you can probably invest in it.
This means you can invest in assets that you personally know and understand to build retirement income.
So, if you have a passion for real estate, you might choose to invest in fixer-uppers or real estate syndications.
If you are familiar with startup companies, you can invest in those, too, along with other private equity options.
Do you have experience with Bitcoin and other digital currency? Well, those options are also permissible in your self-directed IRA.
If you have friends who are experiencing economic hardships due to coronavirus (or for any other reason) your IRA can be the bank and lend them money to tide them over. Your self-directed plan earns income off the interest you assign to the note.
Self-Directed Plans: Traditional versus Roth IRAs
You have the option to move your funds into a self-directed traditional IRA or a self-directed Roth IRA.
Traditional IRAs provide the ability to earn tax-free income in the account, but distributions in retirement are taxable.
Roth IRAs also provide tax-free growth on income the account earns, but qualified distributions are tax free.
Why Should You Move Your Old 401(k) Funds Now?
The stock market’s recent drops due to coronavirus have greatly impacted 401(k)s. The employment rate continues to rise, and the economy is in a bit of turmoil, which is one thing that causes the market to plunge.
Whether you are still employed or not, this presents quite a problem if your 401(k) is heavily invested in stocks as many are. So, investing in more diverse assets that have the potential to produce income quickly can help you recover any losses and continue to build wealth for your golden years.
If you’ve lost your job—you definitely have some decisions to make about your 401(k). But, even if you’re still employed, according to Investor’s Business Daily, because of how coronavirus has impacted our economy, your employer may have to minimize or cancel matching contributions. Depending on their financial situation after this pandemic, they may stop offering retirement benefits altogether.
With this in mind, read on to learn more about the benefits of self-directed IRAs.
Contribution Limits of Self-Directed IRAs
Self-directed retirement plans have the same rules as conventional retirement plans. For 2020, you can contribute up to $6000 a year to a traditional or Roth IRA. If you’re over 50, you can make an additional $1000 catch-up contribution.
Contributions must be made from earned income. If you’re jobless at the moment, you can’t contribute unless you have other sources of income besides your old employer. However, you can benefit from investing your existing funds into tangible assets that aren’t affected by the swings of the stock market.
IRS Rules for Self-Directed Plans
Once you move your old 401(k) funds into a self-directed plan, make sure you understand how the account and investments it holds can be used. These rules also apply to conventional retirement plans, but when you self-direct, it’s critical you understand them.
For example, income from all investments is deposited directly into your self-directed IRA. Expenses must be paid directly from your IRA funds. You aren’t allowed to personally pay a plan-related expense and reimburse yourself.
Also, there are certain people and entities your plan may not transact with in any way. So, your son can’t vacation in a rental property your IRA owns, and neither can you. And, your IRA can’t buy property from you or sell property to you.
You can find a full list of prohibited transactions with disqualified persons in Internal Revenue Code 4975.
Your Retirement Planning Takeaway
It may seem like thinking of your retirement plan should be the last thing on your list of priorities right now. Especially if you’ve lost your job due to coronavirus. And, as fellow humans who have also been affected by these turbulent times, we feel the same uncertainty of navigating these unchartered waters, too. It’s hard to understand how coronavirus will affect us physically, emotionally, and financially in the long term. It’s a real concern for some. But your retirement is a real concern, too.
If you have old 401(k) funds with your past employer, this strategy may be the right move for you. You can move those funds into a self-directed IRA and start investing in alternatives that don’t suffer the volatile market’s ups and downs. For more information, contact Advanta IRA for a free consultation today.