How to roll a 401k into a self-directed IRA

The rollover itself is routine. The mistakes are all in the sequence and the timing.

The order that works

1. Confirm you are eligible. A former employer's 401k is almost always rollable. A current employer's plan usually is not, unless it permits in-service distributions. Read the summary plan description or ask HR directly, and ask specifically about in-service withdrawals after 59 and a half.

2. Open the self-directed IRA first. You need the receiving account number before you can request anything. This is the step people do second and it costs them a week.

3. Match the tax character. Traditional 401k money goes to a traditional IRA. Roth 401k money goes to a Roth IRA. Mixing them creates a taxable conversion, which is a decision to make deliberately with your CPA, not a side effect of paperwork.

4. Request a direct rollover. The words matter. Ask for a direct rollover, trustee to trustee, with the funds payable to the new custodian for the benefit of your IRA. Not a distribution. Not a check to you.

5. Let it go to cash first. The plan will liquidate your holdings. That is not a taxable event inside a retirement account. Self-directed custodians generally cannot accept plan investment options in kind anyway.

6. Wait, and verify. Confirm the funds have posted to the new account and are available, not merely received and pending. Only then start making offers.

Why the indirect rollover is a trap

If the plan pays you and you redeposit within 60 days, the arrangement is technically permitted. It also comes with:

• Mandatory 20% federal withholding on a 401k distribution paid to you. To complete a full rollover you have to replace that 20% out of your own pocket, then wait for it back as a refund. On a $200,000 rollover that is $40,000 of your own cash for up to a year.
• A hard 60 day deadline. Miss it and the whole amount is a taxable distribution, plus a 10% additional tax if you are under 59 and a half. Waivers exist and they are not something to plan around.
• State withholding in some states, on top.

There is no advantage to this route. Ask for direct, in writing, and confirm the payee wording before anything is cut.

The timing mistake that costs deals

People request the rollover, get told "seven to ten business days," and go put an offer on a property.

Then reality: the plan administrator takes a week to process the request. There is a blackout or a quarterly valuation date. The check goes to a lockbox. The new custodian posts it, then holds it for clearance. Then the actual purchase requires a written direction with its own processing time.

Two to six weeks from request to spendable money is the honest range, and everything after funding is also slower than you expect.

So: get the money in place first, then shop. If you must go under contract before the funds land, negotiate a longer close and a financing or funding contingency, and tell your agent up front that a custodian is wiring the deposit. An earnest money deposit that has to clear a custodian's queue is not a competitive offer without preparation.

How much to move

Move what the strategy needs, not everything.

Purchase price, closing costs, and a real cash reserve inside the account. A reserve means six months of operating expenses plus the replacement cost of the most expensive single system in the building. Underfunding the reserve is the most common way these deals fail, because you cannot pay the account's bills personally.

Leave the rest where it is. Self-directed custodians are not good or inexpensive places to hold index funds, and there is no reason to relocate a portfolio to buy one building.

Before you file the paperwork

Two questions worth settling first.

Do you have self employment income? If so, a solo 401k may be the better vehicle than an IRA, particularly for a leveraged purchase, because of the UDFI exception and much higher contribution limits. That decision is far harder to reverse later.

Are you leaving anything valuable behind? Some 401k plans have institutional share classes, stable value funds, or creditor protections that an IRA does not replicate. 401k assets have broad federal protection from creditors. IRA protection varies by state. Worth a look before you move a large balance.