How to Convert a Profit Sharing Plan to Self Directed IRA

by Kristen May

If you are looking for more control over the type of investments that are in your retirement plan, one way to do this is to open a self-directed individual retirement arrangement, or IRA. This is a retirement account that allows you to direct the ways in which the funds are invested. In addition to the usual stocks, bonds, mutual funds and securities, you can also invest your IRA funds in real estate, precious metals and other less conventional investments. If you have funds in a profit-sharing plan from your current or past employer, you can easily transfer these into a self-directed IRA.

Contact the human resources department of the company that opened the profit-sharing plan for you, and get in contact with the plan's administrator. Ask the administrator whether you can convert the profit-sharing plan into an IRA. If you are still working at the job and receiving contributions from the employer, a full conversion may not yet be possible. You might have to wait until you leave the job to carry out the conversion.

Open a self-directed IRA with a bank, investment firm or other institution that offers self-directed IRAs. When filling out the paperwork, let the bank or firm know that you will be using a trustee-to-trustee transfer to bring the funds in from your profit-sharing plan. Note the account number and name of the contact person at the bank or firm, which will help you complete the transfer.

Contact the administrator for your profit-sharing plan and get the required paperwork to transfer the funds out of the plan and into the IRA. If you are no longer working for the company that established the plan for you, you probably received the paperwork when you left the company.

Fill out the paperwork to initiate the trustee-to-trustee transfer, which is also known as a direct rollover. This type of transfer moves the funds from your profit-sharing plan directly into the IRA, without writing a check to you. This ensures that you will not be subject to tax withholding on the disbursement.

Wait for the transfer to go through, at which point the bank or firm at which your self-directed IRA is located will notify you that your IRA has been funded.

Allocate the funds in your IRA into the investment vehicles of your choice. Even if you are not yet ready to devote your time to investing the money in real estate or other investments, you need to select initial investments so your money can start working for you.

Tip

  • You can convert a profit-sharing plan to either a traditional IRA or a Roth IRA. The disadvantage of converting to a Roth IRA is that you will have to pay income taxes on all of the funds you are converting in the current year because you are converting pre-tax funds into a post-tax retirement account.

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