Q: I have $15,000 in an IRA account currently invested in a mutual fund. I am considering converting this into a self-directed IRA account so I can manage my money on my own. My question: Do I simply notify the account executive that I want to cash out the account, then send the check to my brokerage and set up a self-directed IRA? Is it that simple? -- A.R., Seattle
A: It sure is that simple, though it isn't done in precisely that way. Your desire to take your retirement savings out of a mutual fund -- which has an approximately 9 out of 10 chance of underperforming the market index -- and take control of your own finances is praiseworthy. Congratulations. We salute you. We take off our Fool caps and jingle our bells in your general direction.
Now, of course, we want to help you accomplish this feat of transferring your funds. However, some readers' eyes may have glazed over as they ponder the question: What is a self-directed IRA? It's simply an Individual Retirement Account established with a broker instead of a mutual fund or a bank. A self-directed IRA enables you to buy and sell individual stocks. As a result, you make the investment decisions instead of someone else, such as the manager of a mutual fund.
So here's how you transfer those funds: You contact your broker and say that you want to transfer an existing IRA into a self-directed IRA. The broker will send you two forms. (He's motivated! He wants you to park your money with him!) One is a basic IRA application, and the other is a set of instructions to your existing IRA custodian -- the mutual fund, in this case -- directing that agency to liquidate the existing IRA and transfer the proceeds to the new IRA at the brokerage.
Complete and return those forms, and then sit back and wait. In 30 to 45 days, depending on how slow the old IRA custodian is, the money will be in your self-directed IRA. Once the money is there, you may trade at will. With the direct transfer, you won't have to worry about taxes, withholding or any other Internal Revenue Service hassle.
There! Wasn't that simple? You didn't even have to get on the phone with the mutual fund manager and hem and haw and make up some story about how your Aunt Nora really needs the money for a hip replacement. Your integrity is intact, and your money will soon, in all likelihood, be growing much faster.
WHAT NOW? Want to learn more about transferring funds? Rent the movie "Ghost." There you'll see what happens to you if you try to embezzle electronically from your best friend. It's the afterlife, and it isn't pretty. If you want to learn more about online brokerages -- how they stack up against one another -- take a look at our Discount Broker area here at the Fool.
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