Friday, April 07, 2006

Oops.. Almost Made A Mistake

Thanks to Monarchcrest and Steve for jumping all over my plan to roll my old 401(k) into my new 401(k). I originally planned on doing this so that I could draw a loan against it. However, further examination revealed problems with that. Additionally, I discovered I would only be able to borrow 50% of the value, which wouldn't work for me. Luckily, I have not yet submitted my forms for rolling the money into my new 401(k) and I have aborted that plan.

I had totally forgotten about self-directed IRAs. These guys allow you to invest in real estate or just about anything else. There are a bunch of restrictions on who you can invest with and such, so it will take a bit of study on my part before I am comfortable with them. Meanwhile, I have a maximum of 60 days to deposit the funds from my old 401(k) into some other retirement plan and I've used about 1 week of that so far. I am depositing the funds into a Rollover IRA at Schwab. This is just a temporary storage place to park the money to avoid penalties (in case I take longer than 60 days) while I investigate self-directed IRAs a bit more.


monarchcrest said...

That's great Shaun. With self-directed IRA's you can also become a hard money lender with its funds. You have great flexibility on how you can invest that money. Imagine if you used $5k in your self-directed IRA to purchase a home. Then you assign the contract to an investor for $10k. You just made $5k in your IRA. I would assume that you could use your IRA funds to fund your Prosper loans. I don't know all the details on what you can and can't do, but I'm in the process of converting my IRAs to self-directed ones so I'll be doing research as well.

Steve said...

One minor drawback of not using a 401k for loan purposes ON SOME PLANS is that you (could) lose out on the company matched funds. For example, with the 401k plan through my work, my company will match 50 cents on every dollar I contribute up to 6%. Therefore, I'm getting 3% of my monthly pay as free money right off the top. Now, if you withdraw from another investment vehicle to use on an investment that returns >3% that will pretty much mute the point, but you get my drift I hope. :-)

Cameron said...

I have tuned into your blog after linking over from Monarchcrest's blog. I am a local (phoenix) realtor and investor. Self-directed Roth IRA's are a great investment vehicle. They potentially offer tax-free income. You should look into the tax consequences of rolling from the tax-deferred 401(k) to a tax-free (post-income tax) Roth IRA. You will likely have to pay taxes on the amount transferred, and may also face a penalty, depending on the reason for liquidating your 401(k). The upside is that you have a ton of flexibility with the Self-directed Roth IRA. If you need any leads on a custodian, please let me know at

Shaun said...

Cameron - I've got a Roth IRA, but it's not self-directed. It's currently invested in some stocks I really like and want to keep. It's also a relatively small dollar value, in real estate terms, so there's not much sense in using it for real estate. I believe I am also close to the limit of being able to convert an IRA to a Roth IRA ($100,000 modified adjusted gross income). I'd have to check that to be sure.

Anyway, I'm aware of Roth IRAs and their big advantages, but your comments may enlighten some other readers!

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