Moving a Company 401(k) due to Coronavirus Layoff

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Moving a Company 401(k) due to Coronavirus Layoff

Kyle J. CooperPro Member
Investor · Corpus Christi, TX · Member since 2019 · 71 posts · 43 votes

So I'm sure I'm not the only one here that is curious about this topic, but here goes nothing! I'll make it short and (relatively)sweet!

Coronavirus hit the world, no one was prepared.

Companies started closing down.

Pay starts to get cut, and then the layoffs happen.

This happened to me recently and I'm curious what to do with this 401(k). The way I see it, I have a few options.

1.) Keep the funds with my past employer continuing to enjoy the unfortunately less than exciting gains from an actively managed fund(not likely I'll take this option)

2.) Rollover this account into an IRA where I can control where that money is invested moving forward

3.) Cash out, take the early withdrawal fee, tax hit, etc etc and go buy more Bitcoin(highly unlikely to choose this option, but I'm sure plenty of people have done this ha ha).

-Is there any way I could access these funds to use toward a down payment for an investment property, without all the negative side-effects of early withdrawal and heavy taxation?

Anyone else in a similar situation now or in recent history? 

Side thought---I've followed the F.I.R.E. community(Financial Independence Retire Early) for some time now, and so I've thought of using that money to fund my Roth IRA and invest in low cost index funds. Even with this option I'd be taking pre-tax funds and moving them to an after tax account(Roth IRA), and not quite sure about the ins and outs of doing that myself.

***Crummy situation but I hope this brings up a topic that others are going through as well so we can All Get Through This Together(that's the phrase of 2020, right?)

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Brian EastmanPro Member
Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
6y

@Kyle J. Cooper

I suggest you explore the concept of a self-directed IRA. Such vehicles would allow you to rollover your funds tax-free into an IRA - but with a broader range of investment choices beyond just managed funds and conventional stocks, etc.

A self-directed IRA can invest in Bitcoin and real estate, as examples.

The key to understand is that this is purely a diversification of your tax-sheltered retirement savings. The IRA owns a property, pays the expenses, and receives the income in a tax-sheltered means. It is not you investing in real estate personally and having access to the IRA money to do so.

An IRA can use mortgage financing to acquire property. Any loan has to be non-recourse, meaning no personal guarantee from you. When an IRA uses debt-financing as leverage, there is a small bit of taxation on the returns the IRA receives as a benefit of the borrowed funds.

There is lots of good information here on BP on this topic.  Happy reading...  

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  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @Kyle J. Cooper

    I suggest you explore the concept of a self-directed IRA. Such vehicles would allow you to rollover your funds tax-free into an IRA - but with a broader range of investment choices beyond just managed funds and conventional stocks, etc.

    A self-directed IRA can invest in Bitcoin and real estate, as examples.

    The key to understand is that this is purely a diversification of your tax-sheltered retirement savings. The IRA owns a property, pays the expenses, and receives the income in a tax-sheltered means. It is not you investing in real estate personally and having access to the IRA money to do so.

    An IRA can use mortgage financing to acquire property. Any loan has to be non-recourse, meaning no personal guarantee from you. When an IRA uses debt-financing as leverage, there is a small bit of taxation on the returns the IRA receives as a benefit of the borrowed funds.

    There is lots of good information here on BP on this topic.  Happy reading...  

    1Reply
  • Brian EastmanPro Member
    Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @Kyle J. Cooper

    ... forgot to mention.

    In normal circumstances, leaving a 401(k) at a former employer is an option.  In the current environment, we are strongly advising against that if there is any risk the sponsoring employer may go out of business or get merged.  

    Your funds are {likely} safe in a prior employer plan even if the company goes under, but it can be a real headache to get them rolled over in the future if you cannot get a signature from the plan trustee.

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  • Kyle J. CooperPro Member
    OP
    Investor · Corpus Christi, TX · Member since 2019 · 71 posts · 43 votes
    6y

    Thanks for all the information @Brian Eastman I will definitely do some more research on this topic!

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  • Courtney Duong
    Property Manager · TX · Member since 2019 · 327 posts · 69 votes
    6y

    Following.

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  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    6y

    @Kyle Cooper

    Here are some issues to consider in choosing an Self-directed IRA provider:

    1. In order to have checkbook control, the IRA account will need to be at a trust company that will allow the IRA to invest in an LLC (where you will be the manager and your IRA will be member - an as manager you will have checkbook access to the LLC bank account). Therefore, you will want to confirm that the trust company allows for investing in an LLC and the associated fees and minimum balance that applies to the IRA account.

    2. Confirm that the IRA LLC provider will prepare all of the documents needed to not only form the LLC (articles of organization, SS-4 to obtain an EIN) but also the documents needed by the trust company to process the investment of IRA funds in the LLC.

    3. Confirm that the provider has experience with the particular investments in which you intend to invest your retirement funds as you very likely will have questions in terms of the mechanics (e.g. how do you invest in real estate, etc.).

    4. Confirm that the provider has a pristine reputation (e.g. Better Business Bureau reviews, etc.).

    5. In addition, if you are self-employed with no full-time employees you may wish to consider opening a Solo 401k instead of a self-directed IRA as it has several advantages over an IRA LLC such as much higher contribution limits, direct checkbook control (i.e. no need to have the account at a specialty trust company), ability to take a 401k loan, exclusion from unrelated debt finance income tax with respect to investment in real estate acquired with non-recourse financing, etc.

    In addition, please note if you purchase debt-financed real estate with your IRA, unrelated debt finance income tax should apply to the income attributable to debt-financed real estate held by your IRA. Of course, you will want to review your specific situation with your tax advisor.

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  • Kyle J. CooperPro Member
    OP
    Investor · Corpus Christi, TX · Member since 2019 · 71 posts · 43 votes
    6y
    0Reply
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