How to Rollover a 401k Plan
HOW TO ROLLOVER A 401K PLAN?
What is a 401k?
Let’s start at square one and clarify: what is a 401k?
A 401k is a retirement investment account, which you only have access to through your employer, as a benefit. AKA - you cannot go open a 401k on your own (unless you’re self-employed).
Benefits of a 401k
A 401k provides many benefits to you & allows you to easily save for retirement. Some of these benefits include the following:
Directly payroll contributions - If you decide to enroll in your company’s 401k plan, a percentage of your income (that you decide on) is directly deducted from your paycheck and deposited into the account.
Company Match dollars - Often employers will also help you save for your future by offering a company match, which is money out of their pockets, into your account!
Tax advantages - You receive several tax breaks when contributing to a 401k, including lowering your taxable income today (when you contribute), or in the future (when you withdraw)!
Because a 401k is a company sponsored benefit, your employer will work directly with a brokerage (like Fidelity or Vanguard) to design the 401(k) plan. This includes deciding things like how much employees can contribute, whether the company will match contributions, and what investment options will be available. Since the brokerage is providing all of this, they will also charge a fee to each individual who utilizes the plan, to compensate for their services.
Now again, because a 401k is a company sponsored plan, and a benefit through your employer, if you were to ever leave that company, you are no longer eligible to continue contributing to this specific 401k account. This doesn’t mean the money is lost, or that you forfeit what you’ve contributed, it just means you can no longer actively contribute. The dollars you contribute to a 401k will always be yours, and the company match dollars will also be yours as long as you’re fully vested.
So what happens to your 401k when you leave a job? And what action should you take?
You have several options with your 401k once you leave a company, let’s discuss the PROs and CONs of each.
Option #1 Leave your 401k with your employer (essentially no action needed)
While this is not inherently bad, I would advise against doing this, for a the following reasons:
Risk of forgetting about it
Imagine you are 24 years old, and you are leaving your job at company A that you spent the 2 years at, to work for company B. Let’s say you contributed to a 401k a company A…. and you have $5k in your 401k, great work! Now, let’s fast forward 35 years. You are getting ready to retire and you are looking at your finances, and you’ve completely forgotten about that company A 401k because that was SO LONG ago! Thanks to compound interest, if you had received an average yearly return of 10%, the money in your company A 401k could have grown to $140k!! But you don’t remember those funds are even out there. RIP!
Consolidation / Simplification
Imagine over your career, you work at 5 - 10 different companies. Even if you did remember about each of their 401k plans, who in the world wants to have to keep track of all of these different accounts, in different places, with different log-ins, etc! That’s a lot of work to do when you leave your 401k exactly where it is each time you move jobs.
High Fees
Remember how we said that your employer and a brokerage will work together to create a 401k plan for you, and thanks to their services you will be charged a fee? This could look something like a yearly account fee. Each year that you leave your 401k sit with an employer you no longer work for, you are still paying those fees!
Limited Investment Options
Again, remember how we said that your employer and a brokerage will work together to create a 401k plan for you? Part of that process is the brokerage company only giving you a set list of investments that you can choose from. Think about it like healthcare.. When your employer offers you healthcare benefits they might give you a couple different plans to choose from.. They don’t give you every option out there that is available, even though there could be better plans out there more suited for your needs. That’s similar to how it works with a 401k plan and your investment options. You can only choose to invest your money into certain funds that are a part of your company plan. Those investment options also come with another fee called an expense ratio… those are more fees that you have little control over, because of your limited options inside a 401k.
Option #2 Roll your 401k into an IRA
This option is often your best bet! An IRA is an Individual Retirement Account, and is similar to a 401k in the way that you can save money for retirement, and also reap the rewards of certain tax benefits. Here's what makes this option so advantageous:
No Tax Penalties
Because a 401k and an IRA are so similar in the way they operate with taxes, and both have a restriction on when you can start to withdraw your money (age 59 ½), you can roll your old 401k funds into an IRA with no tax fees or penalties!
Lower Fees
Since an IRA is an Individual account, and is not associated with an employer, you get to choose where you open an IRA! Leaving you more opportunity to find a brokerage with low to no fees, and with options to invest in the funds that you are looking for. Often, the fees within an IRA will be lower than the fees you are paying within a 401k, leaving more money in your account to grow and compound overtime!
Financially Tidy
Since you can roll multiple 401k accounts into a singular IRA it also provides simplicity. Now you’ll have just one account to keep track of and manage over the years, rather than multiple 401k accounts.
Option #3 Roll your 401k into your current employer 401k
This option is great because you are again, keeping things financially tidy, by taking each plan with you as you go so that you don’t get to retirement and have to go searching for all your accounts (exactly like option #2).
The downfall here is that in comparison to rolling over into an IRA, you are now slightly limited again with fees & investment options based on what your new employer offers.
Now we understand what our 3 options are for our 401k, after we leave a job. I hope that you’ll consider exploring option 2 or 3 to help your future self out!
So how exactly does the rollover process work?
Often the process will look something link this:
Determine where the funds will go - new company 401k or your IRA?
if it’s an IRA and you don’t already have an account you will need to open one
Initiate a Rollover with your old 401k - this will entail filling out paperwork to tell your funds where they are going
Sharing info such as the brokerage mailing address & your account number
Authorize the transaction - you will execute the rollover by having the funds go directly to the new account, or you will be the middleman to collect the funds yourself and deposit them into your new account in a timely manner
The process can naturally be a little confusing, so the good news is you don’t have to do it on your own!
That’s completely understandable, and is exactly why Capitalize was created, to help you! They specialize in helping you find and move all your old 401(k)s — FOR FREE!
With Capitalize you can save hours of your time by allowing their technology and experts to do all the work, from finding old 401(k)s to managing your rollover.
To learn more about Capitalize, visit here
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