How To Roll Over 401k – One of the biggest financial questions that working people like you and me face when we change jobs is, should I roll over my 401(k) to an IRA?
This is a big decision and not to be taken lightly! This response can later result in thousands of dollars in missed opportunities.
How To Roll Over 401k
Or worse…get it wrong and you could end up owing the IRS thousands of dollars in taxes you don’t want to pay. Yay!!!
New Job? Deciding Whether To Roll Over The Old 401(k)
I faced this decision recently when I made some new changes in my life and decided to change jobs.
I won’t be shy – my 401(k) balance was pretty substantial! 12 years of savings and tons of employee benefits add up to a pretty healthy 6 figure sum.
As I’ve emphasized before, with such a large capital, you don’t want to beat around the bush or delay this decision. Your money can be used to make you more money! That’s the beauty of compounding returns!
So when I weighed my options and asked if I should roll over my 401(k) car into an IRA, all indicators were a green light YES!
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In this article, I’ll explain why and how you can use this thought process to draw your own conclusions if you’re faced with the same possibility of rolling over a 401(k) into an IRA.
Before we explore why an IRA rollover is a good idea, let’s first review what your options are for a 401(k) when you leave your job.
About a week after my last day at work, I received a letter explaining that I had the following options:
Note that if you’re under 59-1/2, you never want to take option 4 unless you’re going through really, really, really tough times financially. (And in that case, there are better options you can take.)
K) Rollover: Options & How To Roll Over To An Ira
Why is it a bad choice? Not only are you destroying your retirement nest egg, but you’ll also have to pay taxes and a 10% penalty on the balance. Think about it: for every $100,000 you’ll probably pay a 25% tax ($25,000) and a 10% penalty ($10,000). Destroys all your earnings!
According to a report by the TransAmerican Center for Retirement Studies, 25% chose this route.
As I mentioned, I prefer option 3 (rolling the 401(k) to an IRA with a private institution) over keeping it in the old plan or rolling it over to my new company’s 401(k) plan for several good reasons.
Most people know that when you choose funds for your 401(k), it’s not free. There is an annual cost to own them. Usually this cost is expressed as a percentage called “cost ratio”. For example, a 0.5% expense ratio means you pay $500 a year for every $10,000 you invest in that fund. These costs are paid to the mutual fund company that manages the fund, and they cover the costs of the fund manager, operations within the fund, etc.
Left Your Job? Review Your 401(k) Rollover Options
Well, in case you didn’t know, the fun doesn’t stop there. There’s a trickier group of expenses you pay when you have a 401(k) called “administrative expenses.” This includes 401(k) fund management, bookkeeping, and more. is a completely separate cost group for things like According to Bankrate, these administrative fees can sometimes range from 0.36 percent to 1.71 percent.
As you can imagine, once you reach a six-figure balance, those cumulative 1 and 2% “surcharges” can really start to add up. This will seriously drain the money in your pocket!
To give you an idea, Personal Capital’s free account has a tool that estimates how much money you’ll lose over time as a result of those 401(k) fees over the next few decades. In just 10 years, he estimates I will lose $85,384! Ah!
So how can we avoid these silly expenses? Simple … don’t keep your money in your 401(k). Take your retirement savings and roll them over to an IRA.
K Vs. Ira Rollover — Sun Group Wealth Partners
Check it out. Vanguard charges a 0.17% expense ratio for its total stock market index fund. If you move more than $10,000, you qualify for their special “Admiral Shares” and the price drops to 0.05%. That’s just $50 for every $100,000 you invest.
If a 401(k) was anything like my old plan, it probably only gives you 20 or so options to invest in.
I say –blah– because you often hear complaints that the funds they offer 1) don’t work well and 2) have very high expense ratios.
While most of the time I recommend just going with one stock market index fund and calling it a day, for more advanced investors, focusing on diversifying your asset allocation can yield some big gains. Check out this post where we describe how good asset allocation can help stabilize your losses during the Great Recession of 2008.
One Big Reason Not To Roll Your 401k Into An Ira When You Leave A Company — San Francisco, Ca
By rolling your 401(k) into an IRA, you open the door to virtually every asset that can be purchased from that financial institution. In my case, whatever Vanguard offers, I can invest.
This means that if I want to dabble in more sector-specific stocks like healthcare or technology, I can!
If you followed my plan for retirement at 45, you know that an IRA rollover was in the works.
Why? Because I would use the 72-ton or backdoor Roth IRA ladder to get early access to my money for early retirement. Both strategies will allow me to start withdrawing from my retirement savings early by age 59-1/2 without paying any penalty.
Should I Convert My 401(k) Into A Rollover Ira? The Pros And Cons
Unfortunately, you can’t use these strategies with a 401(k). That’s because when your money is in a 401(k), your plan administrator (ie, your employer) must give you access to such withdrawals. So if they reject you, you’re out of luck.
Even if you think this is not the case in your business, you should definitely learn. I was very surprised at my last job when I found out that they don’t allow early withdrawals or loans from my 401(k).
By rolling the balance into an IRA, you have all the power (as you should)! If you want, you can give yourself the opportunity to use one of these early access strategies.
Before I wrap things up, I just wanted to make one last point about 401(k) and IRA rollovers and something to keep in mind.
All You Need To Know About A 401k Rollover
When rolling over your retirement savings, the financial institution will ask if you want to roll over to a Roth IRA instead of a traditional IRA. Don’t do this until you fully understand what you are getting yourself into.
When you convert from a traditional 401(k) to a Roth IRA, you switch from a pre-tax account to an after-tax account type. Translation: You’ll owe a ton of money in taxes!
So, if you’re not ready to pay that big tax bill, make sure you switch from a traditional 401(k) to a traditional IRA. There is no tax when you do this.
Bottom line, if you ask me should I roll over my 401(k) to an IRA, the answer for me is a definite yes!
Avoid These Costly Mistakes When Rolling Over A 401(k) To An Ira
Taking control of your life savings is a must in my book. This is something you seriously don’t want to delay or leave in the hands of others. Put your money to work in the most efficient way! While rolling over your 401(k) to an IRA may seem like work, it’s actually a lot easier than you might think. Just pick up the phone or switch to the computer and it’s ready.
As we saw above, this can take 10 minutes or more and could be worth tens or thousands of compound dollars in your retirement years to come.
Readers – How many of you have done a 401(k) rollover to an IRA? What was your reason for doing it (or not doing it)?
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