Laid off...where do I rollover my 401K?

The 401K has become a such a popular employee "benefit" in the last decade, it seems almost every company has sponsored one. Of course when you get laid off due to the current economy, you have what is called a "qualifying event". Sounds nice right? Like hey I qualified for the Olympics. No you got canned and you have this retirement plan that is probably worth 25-50% less than it was worth a year and a half ago. The qualifying event just means that along with all the stress of trying to find a job along with the other 6.9 million unemployed folks, you also have to decide what you want to do with whatever is left of your 401K money.

You know you don't want to leave it with the dogs that just axed you. You can do a "rollover" to a traditional IRA, which are readily available and fairly easy to set up. If you choose a traditional IRA, you will probably be limited to investing in whatever mutual funds your particular plan sponsor offers.

There is another option, that not many people talk about. It is a thing called a "self directed IRA". There is nothing in the law that prevents you from controlling and diversifying where you put your retirement savings. You can use a self directed IRA to purchase stock, real estate, private investments. In fact the only specifically prohibited investments are life insurance and collectibles. There are also certain "prohibited transactions", which are primarily aimed at preventing self-dealing.

You will need an independent IRA custodian to "hold" the IRA assets. The easiest way to manage a self directed IRA is to set up a legal entity called a Limited Liability Company (LLC) with a checkbook that you control to buy assets, collect rents, sell assets and pay whatever expenses are incurred to manage the investments. For tax purposes an LLC is what is called a "disregarded entity". All that means is all the tax activities of the LLC simply pass through to the owner of the company, which in this case would be your IRA. Since an IRA is a tax deferred entity, there is no current federal tax obligation.

There are certain legal documents you need and a specific methodology you want to follow setting up a self directed IRA with an LLC and checkbook control, but it can be done and it is NOT THAT complicated. In fact if your financial advisor tells you it can't be done, he is definitely NOT the one you want to use to set up such an investment. There are plenty of advisors (CPA's, attorneys, financial planners, etc) who are familiar with the process and that is who you need to hire to help you set this up.