Procrastination is my middle name. Every time I lose something valuable due to my procrastination, I promise myself that I will never let that happen again, but when the time comes I do nothing. Again. My most recent inaction has cost me $450 in today’s money (worth $2700 in my retirement).
I quit my job in April and my husband changed his in June. We had two 401ks with our old employers. Life happened and I didn’t get a chance to do anything about them. As we had them in good funds I didn’t see the need to hurry up and do anything about it. Wrong! Apparently my husband’s company changed the fund offering and part of our money was moved over to an “equivalent” fund, which racked up $450 in fees in the last 3 months! I still have not got my head around what exactly happened but seeing $450 in fees lit a fire under me to do something about it.
Most of us take care to not leave an expensive pen in the office after we quit, but never think about leaving thousands of dollars in retirement money with an employer we no longer care about!
What are the options available for an old 401k account?
When I was planning to quit my job I researched what all needed to be done when I left. I learned that once I cut my ties with my employer I am free to do whatever I want with my vested 401k money. I could –
- Cash out the 401k
- Leave it at my old employer
- Rollover to my new employer
- Rollover to a an IRA
As you can imagine, cashing out the 401k is the worst option of all. I have to pay income taxes on my withdrawal AND a 10% penalty.
There are a few situations in which leaving it at an old employer would be beneficial (as I explain below), but for most of us, the choice is pretty simple – roll it over.
Where to rollover your 401k?
- Roll over your old 401k to your new employer :
If you moved to a new job, rolling it over to the new employer is an option. This could be an attractive option if your new job offered a 401k with great investment choices and low fees. There are the pros and cons of moving your old 401k to your new employer –
Pros: The main advantage of moving an old 401k to your new employer comes when you have a low balance in your old 401k and you want to diversify. For example, let’s assume you have $2000 in your old 401k and you roll it over to an IRA. You now want to invest $500 in 4 funds. That might not be possible in an IRA. Your most desirable fund choices might require a $3000 minimum investment each. This is where an employer sponsored 401k can come in handy. It doesn’t matter how much money you have in your old 401k, as there is usually no minimum amount for investment choices if it is part of a 401k. And another reason to move the money to your new employer is if you think you may want to take a loan someday (you can’t take a loan from an IRA).
Cons: You lose the flexibility. It is an employer sponsored 401k, so you are bound to all the restrictions and conditions that your employer/plan administrator has imposed on the plan, which means, you are stuck with the investment choices that are chosen by your employer and pay the fees that are negotiated by them. These two disadvantages can get really expensive.
To have complete control of the money, for most of us, rolling over the 401k to an IRA will be the best option. We could-
- Rollover to a discount brokerage company IRA
- Rollover to a full service brokerage company IRA
- Rollover to a mutual fund company IRA
Again, each of the choices has its own advantages and disadvantages. I rolled over my 401k to Vanguard, a mutual fund company. I chose this option because (1) I was investing in index funds anyway. I didn’t have any individual stocks or ETFs in my 401k portfolio so it made sense to pay as little as possible in fees, which Vanguard excels in. (2) Vanguard had funds that were directly equivalent to those I had in my portfolio anyway AND with lower expense ratios. (3) I had my Roth IRA with Vanguard already, so I was familiar with how they worked. (4) They have a broad range of low cost index funds in case I want to diversify my portfolio further (5) I don’t trade often; I have a selection of funds in which I deposit my money every single month.
Rolling over to a discount brokerage company IRA might be a great option if you want the maximum flexibility. You could have individual stocks, mutual funds, individual bonds, ETFs, CDs… pretty much anything in your IRA. The downside? Cost. Mutual fund investing has one expense, the expense ratio which is built into the fund. If you are trading from within your discount brokerage account, there will be fees for each trade and sometimes transaction costs for buying a mutual fund which you wouldn’t have if you had an account directly with the mutual fund company.
The last and my least favorite place to roll over the 401k is to a full service brokerage company. These companies’ value comes from the financial advisers who manage your money for you, but this comes at a huge cost. Most of the funds I have seen offered by these full service brokerage companies come loaded with fees – high expense ratio funds, ongoing maintenance fees and commissions. If you need a little hand holding you might be better off with talking to a fee-only financial advisor or going with discount brokerage firms like Schwab or Fidelity that also offer some assistance to their investors.
How to roll your 401(k) into an IRA?
The rollover process itself was extremely simple and straight forward.
Rollover an old 401k to a Vanguard IRA
My first try was to do the entire thing online: After I decided to use Vanguard, I logged in to get the customer service number to call to initiate the roll over. On the sidebar I saw a link that said “Start your rollover online”. I clicked it and went through the screens typing everything it asked for. After a few screens, I was asked whether I had part of my 401k in a Roth 401k, which I did. Apparently it couldn’t continue and asked me to call customer service at this point.
At first, I called the general Vanguard customer service number. I was on hold for more than 15 minutes before I hung up. This happened twice. I almost gave up and thought about going with Fidelity (whose customer service I really like). I decided to call them one last time, this time instead of the main customer service number I called the Vanguard concierge (1-800-750-1520). I was connected immediately. After that everything went very smoothly.
- The Vanguard representative checked if I already had an account with Vanguard, which I did.
- He asked me if I had a traditional IRA account or just a regular after-tax brokerage. I didn’t have a traditional IRA account, so he went ahead and opened a rollover IRA account for me.
- After he prepopulated all the information from my after-tax brokerage account, he asked me to check the application and click “Accept”.
- I already had a Roth IRA account, if I didn’t he said he would have created an account for me the same way he did the traditional rollover IRA.
- Once the accounts were set up, he gave me the account numbers to keep for our records and called the Fidelity customer service (I had my 401k there).
- He explained what I was planning to do to the Fidelity representative. He asked her to close my account and make a check out to Vanguard for the entire amount. This is called a direct rollover or trustee-to-trustee rollover. When you call to roll over the 401k ask them NOT to have the check made out to you. If for some reason, they made it out to you, please forward that as soon as possible to your new account. You have 60 days to do so, failing which the entire amount will be considered a distribution and will be taxed.
- Fidelity made the check out to Vanguard but sent the check to us. I wrote a cover letter explaining which check needs to be deposited into which account and what % of the amount goes into what funds (I got 2 checks, one for the traditional 401k amount and another for the Roth 401k amount. They had to be deposited into traditional IRA and Roth IRA respectively).
- That’s it. It took about a week for the checks to arrive after the conversation and another week after I forwarded the checks to Vanguard, for the money to show up in my account.
- While I had the Vanguard representative on the phone, I rolled over my husband’s 401k as well.
Rollover an old 401k to any other firm
Rolling over to any other brokerage firms/mutual fund company seems to follow the same procedure, which can be summarized as
- Open an IRA, if you don’t have one already.
- Request the rollover paperwork from your 401k plan company.
- Fill out the paperwork and initiate the transfer.
- If the check arrives at your doorstep, forward it to your IRA company and invest as you see fit.
Here are the direct links for some popular companies to start your rollover –
- How to rollover your 401k to a Vanguard IRA.
- 401k roll over guide for Fidelity.
- Roll over your 401(k) to an E-Trade IRA
- Roll your old 401(k) or other employer-sponsored retirement plan into a Schwab Rollover IRA
- 401k Rollover planner for T. Rowe Price IRA
- Roll over to an optionshouse IRA
- Roll over your 401(k) to a simple Betterment IRA
Is a 401k rollover to an IRA ever a bad idea?
Sometimes there can be advantages to leaving the money in the 401k with an old employer.
- Former employer’s plan has extremely good investment options and fees which are not available elsewhere (for example: desirable mutual funds that are closed to new investors).
- You are retiring early, at 55. If you are 55 or older this year and plan to retire soon, maintaining the 401k plan will give you an option to withdraw money without penalty prior to age 59 ½. If you move these funds over to an IRA, this option is lost.
- You have a lot of appreciated company stock. This is an interesting maneuver to reduce the taxes paid on the appreciated stock. Let me explain this with an example – Suba has her employer’s stock in her 401k. She paid $10,000 to get the stocks which are now worth $100,000. Option 1: She could move the entire $100,000 to an IRA. In this case, when she retires and withdraws the money she would pay regular income tax on the withdrawal. Assuming a 30% tax rate, she would pay $30,000 in taxes. Option 2: She moves the appreciated stock portion of her 401k portfolio to a taxable account and moves the rest to an IRA. In this case, the cost basis (the amount she paid for the stock, $10,000) will be taxed as ordinary income and the amount by which the shares have appreciated in value (the “Net Unrealized Appreciation”) isn’t taxed until you sell the stock. When she sells the stock it will be taxed as long term capital gains, a maximum of 15%. In this case she will pay roughly $3,000 (30% of cost basis) + $13,500 in capital gains = $16,500 in taxes.
- You are in the middle of a lawsuit or in deeply in debt. The 401k is completely protected from creditors, whereas the maximum protection for an IRA varies by state. Some states give complete protection, whereas states like California protect only what is “reasonably necessary” to support the owner and dependents!! There are other ways like umbrella insurance to protect yourself from lawsuits, but if you feel you need to protect your assets, talk to an accountant before rolling your 401k over to an IRA.
Currently available bonuses for a 401k rollover
I procrastinated for more than 5 months before I did the roll over, but the very next day after I initiated the rollover I saw an ad for a 401k rollover bonus of $600 from E*TRADE. Why didn’t I look these up before? [Facepalm]. Here is the list of them if you are planning a rollover anytime soon. Most of these are tiered bonuses, based on the amount you rollover –
|Where||How much||Promotion details|
|E*TRADE||Up to $600||Accounts must be enrolled by December 31, 2013|
|Optionshouse||Up to $600||To qualify, the account must be funded within 180 days of opening the account. Here are the bonus cash & promo codes for different funding options available:
|Charles Schwab||Up to $600||Enroll between now and December 31, 2013, and transfer your assets within 45 days to qualify for a bonus award|
|TD Ameritrade||Up to $600 in bonus ($100 bonus for $25,000 or more ; $300 bonus for $100,000 or more; $600 bonus for $250,000 or more)||Account should be opened by 3/31/2013 and funded within 60 days of account opening.|
|Merrill Edge||Up to $500 in bonus||Assets held by 401(k) plans through Merrill Lynch are excluded|
|optionsXpress||$100 bonus||Account must be funded with at least $500 by Dec 31, 2013|
Other FAQs on rolling over your old 401k
- Do I have to pay any taxes? Not if you do it right. You have to do a direct rollover (see above) which means your 401k company will write a check for the entire amount to the IRA company. If they write a check to you, you have 60 days to deposit the entire amount into an IRA otherwise you have to pay taxes.
- Can I rollover my Roth 401k? Yes. You can rollover a Roth 401k to a Roth IRA, just as you would roll over a traditional 401k to a traditional IRA.
- How long will it take? The entire process took me about 2 weeks. 1 week to complete the 401k plan side of the work and 1 week for my IRA company to finish the process.
- After losing/quitting my job how long do I have to rollover my 401k? You don’t have a deadline if you leave it at your old 401k. BUT, if you took the cash out of the 401k, you have 60 days before the taxman comes knocking at your door for the taxes on entire amount.
- What about 403b/457b? Any employer sponsored plan, 401k, 403b or 457b can be rolled over to an IRA. The procedure is the same.
- Can I rollover my 401k to my husband’s (or wife’s) IRA? It is called “Individual” retirement account for a reason. No, you cannot rollover your 401k to your spouse’s IRA. You have to open your own.
- Can I rollover my traditional 401k to a Roth IRA? Yes, the amount you convert from traditional to Roth will be taxed, but it can be done. Do the calculation to see whether it is beneficial to you or talk to an accountant before you do so.