The Loophole That Lets You Invest More With Your Retirement Account

The Loophole That Lets You Invest More With Your Retirement Account

Want to invest in real estate, crypto, or startups but lacking the funds? Dip into your 401(k) with a self-directed IRA.

Aug 13, 2021

The Loophole That Lets You Invest More With Your Retirement Account
Active Investing

Active Investing

Retirement

Retirement

Tax Advantaged

Tax Advantaged

Remember that retirement account you've been contributing to for a while that's hiding off in the corner? You might not even know how much money you've got in it, let alone what you're invested in or how much you're earning.

Well, it's time to dust it off and give it a makeover. Average returns on a 401(k) plan hover between 3% to 8%. On the low end, your money is barely keeping up with inflation. Even on the high end, those returns are still...average.

Residential real estate investments, for example, return over 10%. Startup investors regularly see returns well above 20%, and Bitcoin's average annual returns are 230%.

One of the best-kept secrets of the 1% is that you can transfer funds from your retirement account into a self-directed IRA and invest in almost anything you want. This lets you play with the VIPs and take advantage of those double-digit, tax-free returns with money you've already got.

The money-multiplying appeal of the self-directed IRA

While you can control some things with a traditional retirement plan, (like whether you're investing for maximum returns or playing it safe), you don't get to call all the shots. For example, if you want to take advantage of an emerging real estate market or invest in a startup you think will be the next Uber, you're probably out of luck. Most retirement plans only let you invest in traditional assets like stocks, bonds, and cash. 

A self-directed individual retirement account (IRA) lets you use your retirement money to invest in just about anything, which opens you up to the possibility of earning much higher than average returns. Peter Thiel famously used his self-directed Roth IRA to invest in PayPal when it first launched (well before it was publicly available on the stock market)—and he turned $1,664 into over $5 billion. The cherry on top is that he gets to withdraw all that money tax-free when he hits retirement age, because earnings in a Roth IRA aren't taxable.

Can you transfer your retirement account money to a self-directed IRA?

The short answer, as with many investing questions, is hazier than your favorite IPA: yes, most likely, but maybe not all of it. If you're hoping for a more concrete answer that will make you say "sooo satisfying," we break it down below.

You can definitely roll money into a self-directed IRA from a...
  • Traditional IRA
  • Roth IRA
  • 401(k) from a previous employer
  • 403(b) from a previous employer
  • 401(k) or 403(b) from any employer if you're 59 ½ or older
You can probably roll money into a self-directed IRA from a...
  • 401(k) or other company plan at a current employer that includes funds rolled over from a previous employer
You might be able to roll money into a self-directed IRA from a...
  • 401(k) or other company plan at a current employer as long as the funds are vested and your employee plan allows it
You can't roll money into a self-directed IRA from a...
  • 401(k) or other company plan if the funds you want to roll over aren't vested

Every company retirement plan has different rules, and some don't allow you to roll over funds while you're still employed. You'll want to contact your plan sponsor to get the details on what is and isn't allowed within your plan.

No take backs...unless you're the boss

If you received contributions from your employer via an employer matching program, those funds can only be transferred to a self-directed IRA if they're vested. No, we're not talking about vesting up in the bulletproof 50 Cent-style. 

Companies usually include a rule in their matching programs stating that their contributions will "vest over time," which is basically just a way to keep you from taking your money and running. It means that the money your employer contributes isn't fully yours from the get-go but instead gradually becomes yours as long as you don't leave your job. 

For example, if your matching funds vest at a rate of 25% per year, and you become fully-vested after four years, your schedule will look like this:

  • During the first year: You get to keep 0% of your employer's contributions to your retirement if you quit or are fired
  • After one year on the job: You get to keep 25% of your employer's contributions to your retirement if you quit or are fired
  • After two years on the job: You get to keep 50% of your employer's contributions to your retirement if you quit or are fired
  • After three years on the job: You get to keep 75% of your employer's contributions to your retirement if you quit or are fired
  • After four years on the job: You get to keep 100% of your employer's contributions to your retirement if you quit or are fired

The final boss: choosing where to open an IRA

You've found some funds you can transfer to a self-directed IRA, but there's one step left: choosing an IRA custodian.

This is like Mary Poppins for your retirement account. Your IRA custodian is a financial institution that keeps your money safe and sound and makes sure you're complying with all the regulations related to tax-advantaged accounts—and you're required to have one by law.

While traditional banks and brokerage firms offer traditional IRAs, it can be hard to find one that offers self-directed IRAs. Even when they do, these institutions specialize in stocks and bonds and might have more strict rules about investing your retirement funds in alternative assets.

The best places to open a self-directed IRA if you want to invest in alternatives

If you want to be able to invest your retirement funds outside of the stock market, you'll need an institution that specializes in self-directed IRAs and alternative assets. Think Mary Poppins with a Gucci belt and a septum piercing.

These alt-friendly IRA custodians are still few and far between, but AltoIRA is one such platform. You can easily start an account with them, open an IRA, and fund your account with one of your current retirement accounts or a bank account. From there, you gain access to their 50+ partners that make it easy to invest your retirement funds in everything from real estate and land to crypto, art, and startups. If you're a crypto enthusiast, they even have an Alto CryptoIRA that lets you invest in crypto tax-free through Coinbase.

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