Roll Old 401k Into Ira – One of the biggest financial questions working people like you and me face when we change jobs is whether or not I should roll over my 401(k) to an IRA.
This is a BIG decision and not to be taken lightly by any means! The answer later could result in hundreds of thousands of dollars in lost opportunity.
Roll Old 401k Into Ira
Or worse… make the wrong move and you could end up paying the IRS tens of thousands of dollars in taxes you’re not prepared to pay. Wow!!!
The 3 Best Places To Roll Over Your 401(k) — Lendtable
I recently faced this decision when I made some new life changes and decided to change jobs.
I won’t be mean – my 401(k) balance was pretty big! 12 years of saving and earning tons of employee matches adds up to a pretty healthy 6 figure payout.
As I pointed out earlier, with such a large capital, you don’t want to be distracted or delay this decision. Your money can be used to make more money! That’s the beauty of compound returns!
So when I weighed my options and asked myself if I should roll over my 401(k) to an IRA, all the indicators came back with a resounding green light YES!
Rolling A 401(k) Account Into An Ira: Why You Shouldn’t Abandon Your Old Companies’ Retirement Plans — Humaninvesting.org
In this post, I’ll explain why and how you can use this thought process to draw your own conclusions if you’re ever faced with a similar opportunity to convert your 401(k) to an IRA.
Before we get into why an IRA rollover is a good idea, let’s first look at what your 401(k) options are when you leave your job.
About a week after my last day of work, I received a letter explaining that I had the following options:
Remember, if you are under 59 1/2, you NEVER want to choose option 4 unless you have fallen on very, very, very hard financial times. (And even then, there are better choices.)
How To Roll Over Your 401(k) To A New 401(k)
Why is this 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 you withdraw. Think about it: For every $100,000 you owe, you probably owe 25% in taxes ($25,000) and 10% in penalties ($10,000). It pretty much wipes out all of your income!
Believe it or not, according to a report by the Transamerica Center for Retirement Studies, 25% of people have chosen this path.
As I mentioned, I’m choosing option 3 (rolling my 401(k) into an IRA with a private institution) over leaving it in the old plan or rolling it over to the new company’s 401(k) plan for several good reasons.
Most people know that when you choose the funds in your 401(k), they are not free. Annual fees come with your ownership. These costs are usually expressed as a percentage called an “expense ratio”. For example, a 0.5% expense ratio means you pay $500 annually for every $10,000 you invest in this fund. These costs are paid to the mutual fund company that manages the fund and they pay for things like the fund manager, transactions in the fund, etc.
Should You Roll Over An Old 401(k) To A New 401(k)?
Well, in case you didn’t know, the fun doesn’t stop there. There is a second, more complicated group of expenses you pay when you have a 401(k) called “administrative expenses.” This is a completely separate set of costs for things like 401(k) fund management, bookkeeping, and so on. According to Bankrate, these administration fees can sometimes range from 0.36 percent to 1.71 percent.
As you can imagine, once you hit a six-figure balance, those accumulated 1% and 2% “surcharges” can really start to add up. This will greatly reduce the money that should end up in your pocket!
To give you an idea, the free Personal Capital account includes a tool that estimates how much money you’ll lose over time due to these 401(k) taxes over the next several decades. In just 10 years he estimated I would lose up to $85,384! Oh!
So how can we avoid these silly expenses? Simple… don’t keep money in a 401(k). Take your retirement savings and roll it into an IRA.
What Happens To Your 401(k) When You Quit?
Take a look. Vanguard charges an expense ratio of 0.17% for a simple stock index fund. If you transfer more than $10,000, you can get special Admiral promotions, and the price goes down to 0.05%. That’s $50 for every $100,000 you invest.
If your 401(k) was anything like my old plan, it probably only gave you about 20 investment opportunities.
I say blah because you often hear complaints that the funds they offer 1) don’t perform that well and 2) have too high expense ratios.
While I would generally recommend jumping into a stock index fund and calling it a day, more advanced investors can benefit greatly from looking at diversifying their asset allocation. Check out this post that shows how good asset allocation can help stabilize your losses during the big 2008 crash. recession.
Should You Roll Over Your 401(k) To An Ira?
By rolling your 401(k) into an IRA, you open the door to almost any asset that can be purchased from that financial institution. In my case, I could invest in almost anything Vanguard has to offer.
This means that if I want to buy more stocks in a specific sector, like healthcare or technology, I can!
If you’ve ever followed my plan to retire at 45, you’ll know that IRAs have been rolled over all along.
Why? Since I want to retire early, I will use the 72t ladder IRA or Backdoor Roth to get the money early. Both strategies will allow me to start early withdrawals from my retirement savings by age 59-1/2 without paying any penalties.
Moving Your 401(k) Into A Rollover Ira
Unfortunately, with a 401(k), you can’t use these strategies. That’s because when you have money in a 401(k), your plan administrator (i.e., your employer) must give you access to these types of withdrawals. So if you get rejected, you’re out of luck.
Although you might not think this is the case in your job, you should definitely find out. I was very surprised at my last job to find out that your 401(k) doesn’t allow early withdrawals or loans.
When you tip the scales to an IRA, you have all the power (as you should)! You can then give yourself the opportunity to use one of these early access strategies if you wish.
Before I wrap up, I wanted to make one last point about 401(k) IRA rollovers and something to remember.
New Job! Exciting…but What Happens With Your Old 401(k)?
When transferring your retirement savings, the financial institution will ask if you want to transfer to a Roth IRA instead of a traditional IRA. Do NOT do this unless you fully understand what you are getting yourself into.
When you convert a traditional 401(k) to a Roth IRA, you switch from a pre-tax account to an after-tax account. Translation: You will owe a lot of taxes!
So, unless you’re ready to foot a huge tax bill, make sure you switch from a traditional 401(k) to a traditional IRA. Once you do, there is no charge.
Bottom line, if you’re asking me should I roll over my 401(k) to an IRA, the answer to me is absolutely yes!
To Roll Or Not To Roll?
Keeping track of your savings is a must in my book. This is something you definitely don’t want to put off or leave in someone else’s hands. Put your money to work in the most efficient way! While it may seem difficult to roll over a 401(k) to an IRA, it’s actually a lot easier than you think. Just pick up your phone or stick to your computer and do it.
As we’ve seen above, those 10 minutes or so can be worth tens or even hundreds of thousands of dollars added to your retirement years to come.
Readers – How many of you have done a 401(k) IRA rollover? What reasons led him to do it (or not do it)?
Should I Rollover My 401(k) To My New Employer?
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