Diversify your 401(k)

Fidelity came out with a study that showed over half of Americans are at risk of not being able to cover basic expenses while in retirement. In 2022, Bloomberg reported that 401(k) accounts lost 20% of their value, diminishing the funds available to withdraw and a reminder that reliance on a point in time is all it takes to delay retirement.

Overreliance on social security and 401(k) accounts can result in mental stress if basic expenses like healthcare, food and shelter are not covered when the time comes to retire. This will likely also delay your ability to spend the time the way you want to, forcing a “need to keep working” mentality in order to accomplish your goals.

Instead, you can consider different strategies that could yield higher returns, diversify your portfolio and help you achieve your goals faster. More and more retirement savers are becoming aware that you can choose investment options outside of the typical stock and bond portfolio. This can be done by switching your 401(k) to a self-directed IRA.

Self-directed IRA investing allows you to have more control over your investments and allows you to diversify into alternative investments such as real estate, precious metals, private placements and a variety of other options.

Many of us have prior jobs where we contributed to a 401(k) or IRA. What do you do with your old retirement account when switching to a new job?

When you leave your job you can either:

• Keep 401k at old employer
• Roll into your new employer’s plan
• Transfer to a self-directed IRA
• Withdraw your funds

With the withdrawal penalty at 10%, it’s likely best to keep your 401(k) in some capacity. With self-directed IRA investing, there are several advantages. You can defer paying taxes all together, depending on the plan, or at least defer paying taxes for many years. Can you imagine avoiding the tax payment on any profits distributed to you? This is a powerful force when generating wealth, as more money stays in your pocket. Other advantages include:

• More control of where you invest your money. You decide on each investment decision and where the funds are placed.
• Diversified pool of investment options.
• Secured assets. Self-directed IRA’s are protected under federal bankruptcy laws with the FDIC offering deposit coverage for most self-directed retirement accounts.
• Future generations can benefit from your assets. Certain self-directed IRA’s allow beneficiaries to receive assets with little to no tax.

No matter what your decision is, there are limitations to consider alongside the advantages:

• You cannot borrow against IRA funds like you can with a 401(k) account.
• Company stock transfers within a 401(k) account can be complicated.
• You will need a custodian for your Self-directed IRA account. While you can choose what to invest the funds in, you’ll still need to hire someone that acts as a trustee or custodian of the account.

If you decide that you want to take advantage of IRA investing. The typical process to roll it into an account is outlined below.

How to roll:

• Choose a good custodiano   Look for a brokerage offering $0 trading commissions and few, or no, other fees such as IRA custodian fees.
• Fill out necessary formso   Forms are inevitable these days. You’ll likely be given some by your 401(k) administrator to arrange for the money transfer. In general, assets are sold, and the cash is deposited into your new account.
• Transfer the fundso   Your company can transfer for you.o   If not, you may have to write a check.§  Note that if the transfer is not done for you, you’ll need to deposit the funds into your new IRA account within 60 days to avoid tax penalties.
• Choose investments for your new IRAo   Don’t forget to put your money to work!

There are ways to expand your benefit plan accounts to maximize its use. It’s important to first determine your financial goals so that you can then make decisions for yourself that align accordingly. If you decide that self-directed IRA investing is worth looking into further, don’t forget to also get privy on common IRA mistakes, such as required minimum distributions, trading too often and forgetting to designate beneficiaries.