Items you will need
- 401k statement
- Transfer form
An important decisions you must make when leaving a job is what to do with your 401k plan. If you do not handle that transfer properly, you could face a big tax penalty, as well as ordinary income taxes on any money you withdraw from the plan. The best way to avoid those costs is to transfer the money in your 401k directly to a self-directed IRA. A self-directed IRA gives you more control over how your money is invested, which can help that money grow faster.
Contact the human resources department at your former employer, and ask about the procedure for transferring your 401k funds. You typically cannot move your 401k to a self-directed IRA while you are still employed.
Obtain a copy of your most recent 401k statement. Circle the balance on the account. Keep any forms you received from your former employer in a safe place while you research various self-directed IRA programs.
Research the self-directed IRAs offered by various brokerage firms, banks and mutual fund companies. Compare the investment choices each one offers, as well as the costs and associated fees. Choose the program that best meets your needs and your investment style.
Contact the administrator you want to use for your self-directed IRA, and inform its representative you want to transfer a 401k plan into the account. The administrator sends you the transfer forms necessary to make the transition.
Complete the transfer form with all the necessary information, including the name of the current 401k administrator, the approximate balance in the account and how you want the money transferred. If the new administrator allows it, you may be able to transfer your funds as they are currently invested. Otherwise you can sell the investments in the 401k and use them to purchase your chosen investments within the self-directed IRA. As long as you do a direct transfer -- also known as a trustee-to-trustee transfer, because you never touch the money -- there are no tax implications to transferring the money.
You can perform an indirect rollover, in which the funds from your 401k plan are given to you, and you are responsible for depositing those funds in the new IRA. However, this process requires more work on your part and could create a taxable event. If you choose an indirect rollover, your employer might be required to withhold 20 percent for taxes before giving you the proceeds of the 401k. You must deposit those funds in the self-directed IRA within the 60-day time frame required by law to avoid taxes and penalties.