Why do you need to know the details on how to rollover an old 401(k) plan? The average person holds 11 jobs from the age of 18 to 44, according to the Bureau of Labor Statistics, and for many of us that means 11 or more workplace retirement accounts. Because not all employer plans require you to leave the plan when you leave the company, you could end up with several, disparate retirement accounts. I like to use the analogy of being a babysitter when it comes to orphan 401(k) plans. Every time you leave an old an employer and start with a new, essentially you leave a child in a backyard. If you move between three or four different jobs over five to ten years, that means you'll have several kids in several different backyards. The real question is how will you be able to babysit all of those kids and watch them closely from your backyard when they are in multiple backyards? The short answer is you won't, which is why you need to know how to rollover a 401(k).
Important Questions To Ask Yourself:
- Do I Have A Loan On My 401(k)?- If you do, this may limit your ability to move the old 401(k) plan. In fact, if you attempt to roll the 401(k) over the loan will be treated as a taxable distribution which could cost your dearly in penalties and taxable income. You'll want to pay the loan off before you think about moving this asset. It's also important to ask yourself if you think you will potentially need a loan if you don't have one. Rolling this plan to a new 401(k) plan may allow for you to borrow against this asset whereas rolling it into an IRA will not.
- What Are The Fees In My Plan?- Depending on where you roll your 401(k), there will be a cost of doing business. Although most 401(k) plans have a limited number of choices, you may want to consider what the cost is of doing business today and what the fees will be on where you are rolling your 401(k) plan. A big question to ask yourself is whether or not you will need professional advice.
- What Are My Options?- Historically most people choose a set of mutual funds when they pick their 401(k) and never really adjust the fund choices again unless the plan changes providers. Consider whether your 401(k) has enough asset classes to get yourself real diversification or if you need more variety of choices to help you get to your goals. Also, most 401(k) plans offer no downside protection if the stock market were to spiral downwards.
- What Happens If I Cash Out?- The short answer is don't, unless you desperately need the money. If you are under 59 ½, cashing out will generally cause you a 10% IRS penalty on top the 401(k) being treated as ordinary income. Between taxes and penalties, you could lose 30% to 50% of your account. It may also be true that if your balance is too small, your employer will automatically make you cash out. This may be as little as $1,000 or $5,000, so you should ask your HR or Benefits person when you leave your employer.
How To Rollover Your 401(k):
- Make Sure You Have A New Account- The first thing you should do is to make sure you have your new account set up. If you are moving this to a new employer than you should be certain that you have enrolled in the new plan to set up your 401(k) account. Most people who set up a new IRA account to receive the 401(k) rollover will be issued an account number from the custodian you choose. If at all possible, set the account up as a Rollover IRA vs. a Traditional IRA. Rollover IRA's will give you eligibility to re-roll the IRA back to a 401(k) if you so choose in the future.
- Make The Call (or) Get The Paperwork Completed- With most 401(k) plan providers today, you can usually make a phone call to get the check for your Rollover IRA account. You should tell your provider you are looking to complete a 'direct rollover' so they know not to take any taxes out of your account. You should tell them to make the check out to your 'Custodian Name For The Benefit Of (FBO) Your Name IRA' account. Usually it will take 7 to 10 business days for the check to get to your house and in some cases they will send it directly to your provider. Never get a check made out in your name directly.
- Set Up A New Investment Strategy- Depending on your age, risk tolerance, and overall financial goals, you should consider an appropriate investment strategy. With the new Rollover IRA account, you'll have a wide variety of investment options. Do you want to be risky? Do you want to stay conservative? Are you looking to protect your nest egg? Do you want a guarantee on the account? These are important considerations before you invest your rollover account.
- Did You Have Company Stock In Your Old 401(k)- One final consideration is to see whether there is company stock in your 401(k) plan. If the company stock has grown substantially in value, you should discuss with a tax or financial advisor the concept of net unrealized appreciation as a long term tax mitigation strategy.
Who ever thought there would be so many things to think about when you leave your old 401(k) behind when beginning work with a new employer? The exciting part of this is once you get the master Rollover IRA account set up, you can easily move any of your orphan kids (old 401(k) plans) into this account so you can monitor everything in one place. That is a smart money move any of you can make to give you a more clear focus on your retirement picture.
Written by:
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services
Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.
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