What Should You Put in a Rollover IRA?


Americans who retire or change jobs face one of the most important questions of their financial lives: What to do with a 401k plan that might have ballooned to be a huge piece of their net worth after years of saving and employer matching. Excluding the value of any home equity, the 401k plan might very well account for virtually your entire net worth.

So what do you do with it after changing jobs or retiring matters?

For most Americans, a rollover IRA is the best option, as the fees are often lower and the list of potential investments generally a lot broader. Rolling your 401k balance into a rollover IRA is easy and can almost always be done with standardized forms from your new broker.

But moving the funds is only the first step. Once the funds are transferred, you still have to invest them.

When you first started working and contributing to your 401k plan, you were young and had an entire lifetime of saving and investing in front of you. An aggressive allocation to stock funds probably made sense. But by the time you move your funds to a rollover IRA, chances are good that you are in a very different stage of life, and a very different kind of allocation might be appropriate.

But this is what makes a rollover IRA such a fantastic investment vehicle. You can often hold assets in it that you would never be able to hold in a 401k plan, such as gold, real estate or even artwork.

Now, I’m not suggesting you run out and buy an Andy Warhol print with your retirement funds. But the fact is that you can consider more exotic asset allocations with a Rollover IRA than you ever could via your employer’s 401k plan.

So with no more ado, let’s jump into some assets to consider for your Rollover IRA.

Alternative Investments

“Alternative investments” is a broad term that can mean a lot of things to a lot of people.

I try to keep my definition simple. To me, an alternative is anything other than stocks, bonds or cash. This can be anything from raw land to an aggressive futures trading strategy and everything in between.

With bond yields low, I’ve been using various alternatives as a substitute for bonds in client portfolios. In particular, I’ve been using market-neutral hedge funds for accredited investors and private REITs and business development companies for both accredited and ordinary investors alike. And in all cases, I’ve placed them in client rollover IRAs where possible.

This is something that requires a little research, however. You have to be careful what you hold in a rollover IRA because certain assets can create real tax headaches. The same unrelated business taxable income (UBTI) issues that make MLPs difficult to own in an IRA also make certain hedge funds (particularly those that use leverage) difficult to own. You should always discuss the details with your tax advisor before attempting to put an alternative investment in your IRA.

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Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.

Photo credit: GotCredit