This is just a post about some things I learned about opening a self directed IRA.
I recently opened a self directed IRA and transferred some after-tax money in my employer's 401k managed by Vanguard, to the self directed IRA. I'm not a CPA so definitely consult them about if this is something you should think of doing.
One thing I learned is that you will have to pay taxes on any gains you made on the after-tax money you transfer. And you are taxed based on the percentage you transfer. So if you transfer 50% of you after-tax money, 50% of the gains will be taxed.
The other thing to note is that my self directed IRA custodian said they needed to initiate the transfer themselves by sending a transfer form to Vanguard. I'm not sure if this is the case for all custodians. But the Vanguard department that handles my 401k does not accept third party transfer forms. After many days of calling Vanguard and the custodian I finally figured out Vanguard's IRA department does accept third party transfer forms. So I first transferred the after-tax money to a Vanguard IRA account. And from there I could transfer it to the custodian. I know it's a very specific scenario but I hope that helps anyone that is trying to do what I did.
Good comments and that is how it generally works. The company holding the 401k will move the funds internally to the IRA and then it can be transferred out.
I wish I had just asked the BP community first before spending days trying to figure it out. Lesson learned.
we have seen this with some custodians, they have their owns forms but this is uncommon. In most cases receiving custodian would provide a transfer request form.
@Minna Nah Interesting, maybe I just got unlucky in my choice of custodian. The main thing that annoyed me is that neither the custodian nor Vanguard offered to tell me this is how I needed to do it. Vanguard's 401k department just kept saying they don't accept third party transfer forms and the custodian kept saying they must initiate the transfer with their own forms. Luckily I was able to come up with this myself but it would have been nice if someone had just told me. I guess Vanguard isn't really incentivized to help me move money away from them.
Yes Yohannes, there is no incentive for them to help you move your funds out...
@Yohannes Kifle , are you referring to a Roth 401(k)?
There is actually a disincentive to helping you move money out
@Mark S. No I'm not talking about a Roth 401(k). It's a traditional 401(k) plan to allows additional after-tax contributions. It's nice cause you can roll over these after-tax contributions to your Roth IRA even if your income range disqualifies you for direct contributions to your Roth IRA.
@Yohannes Kifle , you can also do the "back door" Roth IRA strategy if your income disqualifies you (albeit, the limit is relatively low at $5,500/year under age 50). You don't see many 401(k) plans that allow what you're describing. You mentioned having to pay tax on the portion rolled. I'm assuming at ordinary income tax rates? Curious why you wouldn't do a brokerage account at long term capital gains rates instead (other than the fact that this couldn't be rolled into a Roth IRA). It would seem you may have more to gain from purchasing outside of retirement accounts and using leverage than going the self-directed route (depending on strategy/comfort level with leverage).
@Mark S. Yeah my employer's 401k is one of these rare ones that allows this I guess. Unfortunately I didn't learn that I could roll over the after-tax contributions into a Roth IRA until recently. And I had already been making after-tax contributions for 2 years. I later learned that I should have made the after-tax contribution and then immediately roll it over to the Roth IRA so there would be no gains to be taxed.
I'm actually using the self directed Roth IRA funds to invest in notes. My CPA told me that it is better to invest in assets like notes using tax advantaged money because notes have to tax benefits like depreciation. So to get the ball rolling I took the tax hit at ordinary income tax rates on my after-tax gains to fund my self directed Roth IRA.
I'm still learning the ropes so I'm not sure that was the absolute best long term strategy. My income does disqualify me from contributing directly into a Roth IRA. When you say "do a brokerage account at long term capital gains" are you talking about a traditional IRA brokerage account?
No, a non-retirement brokerage account.
@Yohannes Kifle I agree with you, generally it is better to invest in notes with your retirement account and buy rental in your own name (because of the tax benefits).
@Yohannes Kifle : The general rule of thumb with rollovers and transfers,,, From any employer sponsored plan 401K 403B, 457, etc... in order to move the monies from one employer plan to another or to an IRA, the funds are pushed out from where they currently are once the receiving account is opened, so you have to follow the documentation and forms of the sending employer plan.
For a transfer from an IRA to another IRA or employer sponsored plan, the funds are generally pulled into the receiving IRA or employer sponsored plan, so you would have to follow the document and forms of the receiving custodian or employer sponsored plan.
This is a general rule of thumb to follow... this may not benefit you now, but maybe for your future.