So you’re hopefully moving on to greener fields and you’re wondering what to do with your old 401k. What most people do is roll over a 401k to an IRA to have maximum investment flexibility.
I’ve been wondering the same thing after watching my 401K grow to a nice little nut after 11 consecutive years at one firm. It’s easy to keep the status quo even though I’ve moved on. However, rolling over our 401K to an IRA for more investment options is a wise choice.
For many of us, our 401K is our most important retirement source. Unfortunately, our 401K alone is often not enough to provide for a healthy financial retirement even if we max out every year for decades.
There are disaster years in the market, fees, and disappointing investment options that don’t fully capture bullish trends. As a result, we fall behind and sometimes miss out on some great opportunities.
Three Main 401K Choices After You’ve Left Your Firm
1) Keep your 401K plan with your existing provider and firm.
2) Roll your 401K over to an IRA with one of the many online brokerages which offer more investment options.
3) Roll your 401K over to a ROTH IRA, which requires you to pay taxes up front.
* The ill-advised choice is to cash out your 401K because you will pay taxes on all your funds as well as a 10% penalty.
The Benefits Of Rolling Over Your 401k To An IRA
Let’s say you have multiple retirement accounts given you’ve changed jobs and left each plan multiple times. You will have multiple statements to look at, extra fees to pay, different customer service representatives to talk to, and different numbers to dial. What a pain!
By consolidating all your accounts into a Rollover IRA or Rollover ROTH IRA, you get to reduce your fees and your headaches.
How To Start A Rollover IRA
1) Select one of the many Rollover IRA options that have no annual IRA maintenance fees or account minimums.
2) Contact your former employer or plan administrator and fill out any required distribution forms. Instruct your plan administrator to issue a distribution check to your new IRA provider to the benefit of your name. Obviously call your new plan adminstrator if you need help.
Rollover IRA Has The Same Tax Benefits As A Traditional IRA
* No immediate taxation i.e. only pay taxes upon withdrawal.
* Benefit from tax deferred growth on earnings.
* Avoid a 20% penalty on cashing out.
You Can Convert Your Rollover IRA To A ROTH IRA
* You must pay taxes upfront, which may be good if you are in a lower income tax bracket and think taxes are going up.
* You can then withdraw tax free after age 59.5 provided the account has been open for five years.
* Avoid a 20% penalty on cashing out.
Investment Strategies To Consider
You can invest your funds on your own, or you can have your plan provider have someone actively manager your account for you for an added fee. Their goal is to obviously keep you happy and make money, or else you are going to fire them or even take your money elsewhere.
Having spend the last 13 years in finance and writing a personal finance blog for the past eight years, I feel comfortable investing my own money. Just remember that when you go with an advisor, if s/he was so good, they wouldn’t be advising and be sitting on the beach somewhere sipping Mai Tai’s since they’d be so rich outperforming the markets!
The Rollover IRA makes a lot of sense for those who are disgruntled with their existing investment options and like to invest on their own. Right now, my 401K has about 25 different funds to choose from which is plenty enough to gain exposure to the markets. However, there are no options to invest in municipal bonds, hedge funds, derivatives, ETFs which carry much lower fees, IPO’s, and single stocks via my 401K plan. With a Rollover IRA with many of the online brokerage houses, the options to invest are endless!
One of my colleagues rolled over his wife’s 401K to an IRA and invested $5,000 in Bank of China warrants that made him over $90,000 in six months! He then proceed to buy a BMW 745i with the ticker symbol of the stock. It was hilarious!
The Best Platform To Roll Over A 401k
I think Betterment, the pioneer in robo-advisory is one of the best options for rolling over your 401k. They will automatically reinvest your portfolio in low cost Vanguard ETFs in a risk-adjusted manner.
Go to their website and click “open new account” for current clients, or “invest now” if you are not yet a client. Then select the option to “transfer an existing account”. Complete the information and your IRA will automatically transfer in 5-10 business days.
Please note that they will sell any positions in your existing IRA account upon transfer to Wealthfront and reinvest the proceeds per your Wealthfront investment plan.
Transferring your existing IRA to an IRA at Betterment is not a taxable event.