The 401(k) Rollover in 4 Simple Steps

Twelve.

That’s the average number of jobs that today’s youngest baby boomers have held.1 And millennials are headed in the same direction. This trend isn’t happening for bad reasons—it’s just a reflection of how the job market is becoming more flexible.

If you have an old 401(k) to roll over, pat yourself on the back! This is a good problem because you’re ahead of the game and you’ve already started saving for retirement.

So, how do you make sure you’re taking your hard-earned money with you when you leave a job? A 401(k) rollover is not complicated, but it will take some time and research to figure out.

What to Do With a 401(k) After Leaving a Job

Here’s an overview of what you could do with the money you’ve saved in your old 401(k):

Option 1: Leave your 401(k) at your old job.

Option 2: Roll over the money into your new employer’s plan.

Option 3: Roll over the funds into an IRA.

A quick side note: These four options are the same for a 403(b) rollover. A 403(b) is just like a 401(k), except it’s offered at tax-exempt institutions, like schools, hospitals and religious organizations.

Let’s take a look at each of these options in detail.

Option 1: Leave your 401(k) at your old job

It might be possible for you to leave your 401(k) at your old job. If your old plan had really low fees and great investment choices, this could be a good decision, but not necessarily the best option. You might pay higher fees since you don’t work there anymore. Check with the plan administrator to see how this would work.

And leaving your investment money at your old job can become highly inconvenient. You’ll have to review multiple statements, which could cause a big headache as you try to keep up with your progress toward your retirement number. Also, if you didn’t leave your job on the best terms, do you think it’s a good idea to leave your investment money there? Nope! Use common sense as you explore your options.       

Option 2: Roll over the money into your new employer’s plan

Your new workplace 401(k) might allow rollover contributions. Talk with someone in HR to get the details for this process. 

One of the main benefits of consolidating your money in your new 401(k) is that you’ll simplify your life. All of your investments will be in one place, and you won’t have to check multiple accounts. You’ll also have higher contribution limits with a 401(k) than you do with an IRA (more on that in a minute).

But hear me on this: You need to do your research and see if you like your new employer’s plan. If the fees are high or your investment options aren’t that great, then you might be better off transferring your money into an IRA. Also, there might be a waiting period before you can contribute money at your new job. If you have to wait a year (or more!) to keep investing, then you should consider opening an IRA in the meantime.  

Option 3: roll over the money into an IRA

Opening an IRA (Individual Retirement Arrangement) might be your best bet for a few reasons:

  • You can open an IRA on your own. If your new job doesn’t offer any sort of retirement savings plan, then you should absolutely open an IRA so that you can keep saving for retirement. Unlike a 401(k), you don’t need an employer to open an IRA.
  • You won’t be subject to a waiting period. Most employers will impose a waiting period for new employees—often a year or so before they can participate in the retirement plan. You don’t want to miss out on consistent contributions to your financial future, so opening an IRA will allow you to keep investing until you’re eligible for your company’s plan.
  • More investment options and lower fees. Generally speaking, you have more investment options and lower fees with an IRA than you do with a 401(k). Some workplace 401(k) plans can have a lot of rules and expensive fees.

One disadvantage is that IRAs have a much lower yearly contribution limit than a 401(k). In 2020, you can invest up to $6,000 per year in an IRA (or $7,000 per year if you’re 50 or older, since you can take advantage of the “catch up contribution.”) However, with a 401(k), you can invest $19,500 per year (or $26,000 per year if you’re 50 or older).

THE 401(K) ROLLOVER IN 4 SIMPLE STEPS

Every company has different rules about their retirement plans, so it’s important to know your options. Ask questions until you understand the steps. You don’t want to make a mistake because you were too embarrassed to ask. It’s your future, so take control of it!

That being said, here’s a simple process you can follow for your 401(k) rollover. 

  1. Meet with an investment professional. You’ve worked too hard to lose a single penny as you roll over your old 401(k). I recommend that you talk to someone who cares about helping you make the best decision possible. SmartVestor is a free tool that can connect you with investing professionals in your area. They can guide you through the process and make sure you’re getting the most out of your investments.   
  2. Choose a new account for your funds. There are several options for where you can put your current investment dollars. If you have an existing IRA, it makes a lot of sense to roll over your funds into that account. However, you could transfer the money to a new account:
    • New 401(k): Once again, you’ll need to ask your new employer whether or not they accept rollover contributions. Do your homework and compare investment options and fees with your workplace retirement account versus an IRA.
    • Traditional IRA: Like a workplace 401(k), you contribute to a traditional IRA with pre-tax dollars. However, you can open an IRA through a bank or brokerage firm, apart from an employer. You can also open an IRA through a bank, mutual fund company, or brokerage firm. You’ll need your Social Security number and driver’s license or another form of ID.
    • Roth IRA: You can also put 401(k) funds into a Roth IRA. The process is the same as with an IRA. However, if you roll over 401(k) funds to a Roth IRA, you’ll have to pay taxes on the 401(k) money. A 401(k) is funded from your paycheck before it’s taxed. If you do decide to move the money and take the hit on taxes, the good news is that the Roth money grows tax-free. Tax-free retirement, baby! I like the sound of that.
  3. Fill out paperwork. Ask your current plan administrator for the forms you’ll need to make the transfer. Many brokerage firms will handle the entire 401(k) rollover online. Still, I encourage you to make a phone call before you start the process to get all the details. When it comes to your financial future, there are no stupid questions! Your money should go directly from the old 401(k) account to the new account of your choice. Don’t ever have funds sent directly to you. If, for some reason, you receive a check, you have 60 days to deposit the check before it’s penalized and counted as income for you that year.
  4. Make investment choices. Once your money hits your new account, you still need to make investment decisions. Your IRA or 401(k) is like a sack that holds your groceries. You still have to choose the groceries—in this case, which mutual funds to invest in. Your investing pro can help you through this.

How long do you have to roll over a 401(k)?

If you have an old 401(k) or 403(b) living with a former employer, that money is yours! You can decide to transfer it at any time, even if it’s been a few years.

If your former 401(k) provider issues you a check with your investment money, you must deposit the money into your new account within 60 days. If you don’t, the government considers this a taxable event, and you’ll lose a lot of money! 

To make sure that this problem doesn’t happen, request a direct wire transfer so that the money lands safely into your new account.

why you should never cash out a 401(k)

When you’re changing jobs, you might be tempted to cash out your 401(k) and use that money. Listen to me: This is never a good idea. You need to talk to yourself like you’d talk to a three-year-old near a hot stove. Don’t touch it! Leave that money alone. There are two big reasons why:

  • You’ll pay huge penalties. When you withdraw your money early from a 401(k), you’ll pay a 10% early withdrawal fee, along with federal and state income tax. These fees could total 40% or more!
  • You’ll steal from your own future. Let your investment hang out with its two best friends: time and compound interest. If you do, you’ll see your savings multiply in massive ways. It takes grit and self-control to have long-term vision, but it’s worth it. 

Roll Over Your 401(K) with Confidence

If you’re looking for some guidance on investing, I encourage you check out SmartVestor. It’s a free tool that connects you with investment professionals in your area. Each Pro has been vetted by our team here at Ramsey Solutions, because we want to connect you with someone who has the heart of a teacher and who will only recommend tried and true investment options.

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