ollover Your 401K Plan into a Self-Directed IRA
EggMoney

How would you like to rollover your 401K money into a self-directed IRA and begin investing that money in real estate? It can be done. Here’s how:

401K partitions give control over assets
Suppose you’re a Texas resident; you’re married; and you work for an employer that sponsors a 401K or other retirement plan for its employees. The kinds of investments permitted by the plan are of course the typical Wall Street variety – stock, bonds, mutual funds, etc. Over the years, your plan assets have grown to a sizable amount. You would love to have access to some of that wealth to invest ideal estate, but it looks as though that will never happen. But wait. There’s a solution.

As a Texas resident, your 401K plan assets are community property. This means those assets are owned by both you and your spouse. (Yes, even though those retirement assets are in your name; even though it was your hard work and energy that created those assets; they are owned jointly by you and your spouse as community property). By using provisions of the Texas Family Code allowing for the partition (division) of community property, you and your spouse can enter into a written agreement dividing those 401K community property assets into two “separate property estates” (as they are called in Texas), one estate in your name and one in your spouse’s name. Your separate property estates can be in any percentage you agreed upon in the partition agreement. Let’s say, for example, its 50-50.

Certain provisions of ERISA (the Employee Retirement Income and Security Act of 1974) – the federal legislation that created and continues to regulate all employer retirement plans – give Texas state courts the authority, under narrowly defined circumstances, to issue orders to ERISA plan administrators directing the administrators to recognize the rights of a non-employee spouse in and to the employee spouse’s plan assets and to separate those assets as provided in the order.

Making use of these ERISA provisions, the written partition agreement you and your spouse enter into will be taken to a Texas court where a judge will confirm the partition as a valid division of community under the Texas Family Code and will issue an order directing your plan administrator to divide your plan assets in the separate percentages provided for in your partition agreement.

Because your spouse is not employed by your employer, she or he cannot participate in the plan, so the percentage of the plan assets now owned by your spouse must be withdrawn from the plan. This can be done by rolling over the entire amount into a self-direct IRA in your spouse’s name, with no penalty or table event. Or, your spouse could take possession of the cash or its equivalent – in which case a 10% early withdrawal penalty must be paid and the full amount of the withdrawal reported on your spouse’s separate 1040 tax return or on your tax return at year end. That choice should be a no-brainer.

The Texas court order that orders your plan administrator to divide your plan assets will not come as a surprise to the administrator; we will approach the administrator with the partition agreement after it is signed, together with a draft of the proposed order, and obtain the administrator’s agreement to the entire process. As long as the proposed order conforms to the applicable provisions of ERISA, the administrator must honor its terms.