This topic I have to address, as lately I’ve had several similar comments that basically reflect to the title of this blog. Many people erroneously believe that when they choose to self-direct, they have to self-direct their funds into the same type of account from the type of account that it is coming from. Since I’ve never been a great writer, let’s put it more bluntly:
Many people believe if their funds are in an old 401K, then they have to roll it over into a new 401K, and if their funds came from an IRA, then have to move their funds to a new IRA.
Is any part of the previous statement true? Well, yes, but not for the reason many think. It is true that Roth IRA funds cannot be transferred into a 401K plan unless it is a designated Roth 401K. Otherwise, however, there is no truth in the statement.
Simply speaking, other than the aforementioned example with the Roth IRA, most funds from other retirement plans can be transferred or rolled over into a new IRA or 401K. Where the funds “go” (transfer or rollover) is more contingent upon the employment status of the account holder and really has nothing to do with what type of account it is coming from.
For example, if the individual is self-employed, that individual qualifies for the 401K plan and, as a result, both IRA (non-Roth as mentioned earlier) and old 401K funds can be brought into the newly-established 401K. Conversely, if the individual is not self-employed (typically a W-2 employee or retired), both IRA and old 401K plan funds can be transferred/rolled over into the IRA, not the 401K. So, it makes no difference (generally) what type of funds are going into the new plan, but what entity “type” the new plan is.
Let’s break this down a bit further and examine the permissibility and restrictions in rolling over other retirement fund accounts into either IRAs or 401Ks.
Roll to a 401K? — Roll to an IRA?
Roth IRA NO NO
IRA (Traditional) YES YES
SIMPLE IRA Yes, after 2 years Yes, after 2 years
SEP-IRA YES YES
457 (government) YES YES
401K (pre-tax) YES YES
403B (pre-tax) YES YES
BawldGuy Here: I apologize for the helter-skelter appearance of the data above. I was unable to correct it adequately. Why, you may ask? Cuz I’m a TechTard when it comes to that stuff.
As you can see, just because someone has an IRA doesn’t mean they can only roll it to another IRA. And, the same applies to the 401K plan as well. It depends on how and what “entity” is established and what the person qualifies for.
Obviously, this is a brief breakdown on rolling over funds into an IRA or 401K . . . as these are the types of accounts that people typically utilize for their self-directed accounts. If you are interested in learning how other retirement accounts can or cannot be rolled over into other retirement account entities (whether self-directed or not), please feel free to ask OR also visit www.irs.gov and search for Tax Information for Retirement Plans Community.