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401k Rollover

Updated on November 4, 2010

Time For Your 401k Rollover

Most of you have seen the commercials on TV regarding the 401k rollover.  But what is a rollover and how do you conduct a rollover?  I’ve helped numerous friends and family over the years walk through the steps that I will now share with you.  I’m also going to put a bit of a twist on things and talk about how to use your 401k rollover to finance the purchase of a business, buy real estate, precious metals, and other tangible investments that the typical stock broker does not want you to know about.

The rollover actually is called a custodian-to-custodian transfer.  The transfer of your 401k account is transferred to a new custodian and into a newly opened traditional individual retirement account (Traditional IRA or IRA).

What Kind of Investor Are You

You need to be very honest with yourself and decide if you are going to seek professional help (no, not that kind) or are you going to become a do-it-yourselfer.  You may find that you are a bit of both as I am. 

If you’re going to do it on your own then make sure you have the time and knowledge to keep track of your investments.  You should also know something about how to pick the type of mutual funds or stocks that fit your investment temperament and risk profile.

If you do seek the help of a professional I would suggest finding an independent advisor that has the ability to work on a fee type of a basis.  This kind of advisor does not get paid commissions but is paid according to a fee schedule.  The fee can be a one time fee arrangement, annual retainer, or charge you a percentage of your portfolio on an annual basis.  The latter is more common if the advisor is going to be helping you manage your investment portfolio and provide ongoing investment advice.  Most advisors charge anywhere from .50% up to 2.0% annually depending upon the size of the account. 

This arrangement is desirable in my opinion because the advisors interests are now aligned with you; if you account goes up in value then you both make more money.  A fee based advisor will also probably be more willing to help you if you decide to go the route of opening a self directed IRA account.

Remember, our advisors are there to provide us with objective advice regarding financial, legal, and tax decisions.  They keep us small business owners from doing really foolish things. 

Types of Accounts

Now that you have a better idea of how you are going to proceed you will open an account with one of the following custodians.

·      Mutual fund company

·      Online discount broker

·      Full Service Broker

·      Independent Financial Advisor

·      A Self Directed IRA Custodian

The Steps To Conducting Your 401k Rollover

Here are the steps I’ve seen take place in helping my family and friends over the years.  You can find most of this information anywhere online but I thought I would provide it so you don’t have to go hunting for it.

1.     Request your rollover paperwork from your former employer.  You can usually contact the human resources department for this paperwork.  If they don’t have it then the HR department will give you the number of the 401k provider handling the company’s plan.

2.     Open and account with the new custodian.  This can be a mutual fund company, online discount brokerage, full service brokerage, or an independent financial advisor.

3.     Fill out the rollover paperwork and provide the 401k provider with the new account number and address of the custodian you will be using for your IRA account.  Keep in mind that some 401k plans require your spouse to provide a notarized signature stating that they understand you and conducting a rollover and opening an new IRA account.

4.     Wait about 5-15 business days and the transfer should be complete.

5.     Invest the proceeds according to your investment plan.

The Self-Directed IRA Option

How do I finance my business idea or a business that I would like to buy?

This seems to be the single greatest universal question when someone is looking to go into business.

You can borrow from friends or family but this is the least desirable in my opinion.  Nothing will kill a relationship faster than problems over money.  Your bank may be another source but may be unwilling to fund your venture for numerous reasons.

For those of you that have a 401k or and IRA there is an alternative to borrowing. You can use your retirement fund to capitalize your business.  I'm not talking about pulling your money out of your plan, which creates a taxable event.  I'm talking about a way to roll your retirement money into an account that you can now use to finance your business.

The typical person with $100k in a 401k pulls the money out, gets hit with a ten percent penalty, has twenty percent automatically withheld, and increases their overall taxable income by an additional $100k which could also bump them into a higher tax bracket.  I've seen these mistakes made by new business owners.

Keep in mind that this strategy is not a cure all and carries substantial risk.  If your business fails you also loose your retirement nest egg.

Self Directed IRA Custodians

Our discussion would not be complete without giving you a short list of self directed IRA custodians.  I have no relationship with any of these providers and they are only a starting point for you to do your own research.

·     Sovereign Pension Services International (I have met Larry Grossman personally at an investment conference in Panama a few years back and I believe they provide solid services with reasonable fees)

·      Sterling Trust (I have a friend that has done business with them and does not seem to have any complaints)

·      Guidant Financial (The only complaint I’ve heard is their fees are a bit on the high side but I do know they have a private letter ruling from the IRS allowing them to help you fund your business using retirement funds)

·      Mid-Ohio Securities

It is up to you to conduct your own due diligence on any of these providers and I provide them for informational purposes only.  This is your starting point to conduct your own research and make the decision for yourself or with the help of a trusted advisor.

This article is for informational purposes only it is not meant to provide legal, tax, or investment advice.  You should consult with your own advisors before implementing any of the ideas or strategies shared in this article. 

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