I recently wanted to transfer some of my IRA money out of a nationally-known broker to a local one. I didn’t think the national one was doing as well as they could. I like to keep my money local anyway. Great idea! It’s my money, right? Wrong.
Frustratingly, they said they ‘couldn’t’ release the money because I was still an active employee. I am a W2 employee, working what we call PRN, or as needed, in the Emergency Department. When they have a need in their physician schedule, we talk about the date and my price, and I may or may not take the shift.
Employed physicians work very much like independent contractors. Many states don’t allow corporations to practice medicine, which means they can’t tell a physician how to take care of a particular patient. This is sensible. And it is one of the criteria that must be met for an independent contractor. Yet, many physicians are W2 employees.
IRA laws put big restrictions on what can be done with the person’s retirement money. The government doesn’t want people spending their retirement and then relying on Social Security, so the government doesn’t like you messing with your IRA money. Hence the rule that when you are a W2 employee, you can’t take out your retirement money, even to transfer (rollover, in IRS speak) to a different brokerage.
So, I had to quit my W2 and become a 1099 independent contractor for the same hospital, doing the same job, to free up my IRA. Now, I can use a SEP IRA, which allows me to contribute over 2x the pre-taxed income. If you are a W2 employee, you likely won’t have access to your retirement money anyway.
What is a Self-Directed IRA?
Thankfully, lawmakers decided to give you a way to have some more control over your own retirement money. This type of IRA is really a tax designation which allows you to decide where to invest your own money. It has restrictions. It needs to be handled by a qualified trust company. I use IRA Financial Trust. Not an endorsement, but they have worked well for me. These companies can give you a lot of information on what you can do. You can even invest in your own real estate projects, but most people will look to put it into a passive endeavor, run by someone else.
Steps to Take Advantage of the Self-Directed IRA
You first will need to rollover your IRA funds. That means leaving your job. If you’ve done this previously, you’ll have an account somewhere from the previous employer that is already free. If you haven’t and don’t want to quit your job, then you are stuck.
- Select a self-directed IRA trust company
- Contact your accountant to discuss tax implications – they exist
- Find a real estate deal in which you want to invest.
- Initiate a rollover from your current IRA company to the new one. This will involve a transfer of funds and possibly a fee. Don’t do this until #3, otherwise your funds will be sitting in the trust account not making any money.
- Initiate a wire transfer from the current IRA to the investment project.
That’s it. It is very easy and it’s a wonder not more people do it. Consider it to open a big door to investing in the future.
