How to Roll Funds From a 401(k) Into a Self-Directed IRA

Expect a 1099-R for reporting to the IRS, even though you rolled over your account.

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Your employer's 401(k) provided an convenient tax-deferred method for building your retirement savings. However, now that you've left the company, you're thinking you'd prefer the additional options and flexibility of a self-directed IRA. Making the transition is relatively easy, if you know the rules.

Step 1

Set up your new self-directed IRA with a custodian. This may take some shopping around as some custodians don't offer the self-directed option. You'll also want to compare fees.

Step 2

Contact your former employer's human resources department or the plan administrator and tell them you want to transfer your 401(k) account to a self-directed IRA. You will probably have to fill out some forms.

Step 3

Decide if you want to do a direct transfer or an indirect rollover. In a direct transfer, the funds move directly from one plan to another. In an indirect rollover, you receive the check, but your employer will withhold 20 percent for taxes, because as far as it's concerned, you have taken a taxable distribution.

Step 4

Deposit the full value of your account within 60 days, if you chose the indirect rollover option. Whatever you do not deposit, including the 20 percent withheld by your employer, will count as a taxable distribution. In addition, if you have not reached early retirement age, which is normally age 59 1/2 but could be age 55 for 401(k)s, you will have to pay an additional 10 percent penalty.

Step 5

Report your transfer or rollover on Line 16a of Form 1040 or Line 12a of Form 1040a. You must do this even if you rolled over the amount. The amount will show up on the 1099-R your 401(k) plan administrator will send you. If you rolled over the entire amount, record $0 on Line 16b or 12b for taxes due and note that it was a "rollover."