How To: Rollover Your Old 401(k)
If you are leaving a job or left a job a long time ago, you’ve got options for your old 401(k). Everyone loves options. You might be quick to say, “why can’t I just leave it?” Well, you can. But, there are better options.
“According to a recent study done by Capitalize, about $1.35 trillion are in “forgotten” 401(k) plans by more than 24 million participants. About 2.8 million 401(k) plans are left behind every year, and the average balance in a forgotten 401(k) is $55,400. Forgotten 401(k) plans could cost individuals nearly $700,000 in lost retirement savings over their lifetimes because of the risks of higher fees and lower returns.”
I don’t want you to be part of any of those statistics, which is why it’s important to know what to do when you leave an employer and were contributing to a 401(k).
Here’s what you can do when it comes to an old 401(k).
Cash it out – By cashing out your old 401(k) you could have a chunk of cash monies to go buy whatever you want. Sounds great until it isn’t. You’ll pay taxes on that money because with a traditional 401(k) you have not paid taxes yet. And you bet your ass, Uncle Sam wants his money.
Not only will you pay taxes, you’ll pay penalties. A 401(k) is a retirement account, meaning you’re not supposed to withdraw funds until you’re 59.5. Any time you withdraw or use the funds prior to 59.5, you’ll be penalized 10%.
Taxed and penalized. Talk about a double whammy.
If you really need the cash due to an emergency, you can pay the taxes and penalties. BUT (big 🍑)….there are limited circumstances in which you can withdraw from your 401(k) without coughing up taxes and penalties. These are called hardship withdrawals.
I think you get my point – Don’t cash it out unless you really need it.
Leave it where it is – This isn’t the worst option, however, should anything happen to your employer, trying to find your money would suck. Additionally, most 401(k)s don’t have a lot of investment options and typically you’re investing in funds with higher fees.
By leaving your money where it is, you risk high fees in investments that may not be the greatest choice for you.
Forget about it – As I mentioned earlier, way too many people forget about their old 401(k) accounts.
“The Center for Retirement Research at Boston College estimated that there are over 24 million forgotten 401(k) accounts holding $1.35 trillion in assets, and another 2.8 million accounts left behind annually.”
–Gaurav Sharma
4. Rollover your old 401(k) to your new employer’s 401(k) – This takes longer, and it is only an option if your new employer permits it. This is known as a 401(k)-to-401(k) rollover.
To be quite honest, it’s a hassle, and you nor I have time for hassles, BUT, if you really like the investment options available for your new 401(k), and the fees are low, then this could be a good option.
5. Rollover your old 401(k) to an IRA – With an IRA you will have access of your own retirement account, access to lower fees, and access to more investment options. This is the most common choice people make when it comes to rolling over their old 401(k).
6. Rollover your old 401(k) to a Solo 401(k) – If you are your own boss and have a Solo 401(k) you could roll it over into this account instead. Personally, this is what I did instead of rolling over into a Traditional IRA which is the most common way most people complete a rollover. The reason why I chose my Solo 401(k) is so that I didn’t run into any pro- rata issues and not be able to complete my favorite legal loophole, the Backdoor Roth IRA.
Number 5 is the most common option people do when trying to figure out what to do with their previous 401(k) from an employer. But, there’s traditional IRAs and Roth IRAs. So which one do you choose for your rollover?
Do I rollover to a Roth or Traditional IRA?
Great question. Thanks for asking.
Below are your options:
Option 1: If you have a Traditional 401(k), you can do a direct rollover to a Traditional IRA. You could then choose to convert it to a Roth IRA, but there will be tax implications.
WHY? Because contributions in a traditional IRA have not been taxed yet and a Roth IRA’s contributions are post-tax. You don’t want to piss off Uncle Sam.
Option 2: If you have a Roth 401(k), you have two options depending on if your employer matched contributions or not.
If your employer matched contributions, you would rollover YOUR CONTRIBUTIONS to a Roth IRA and YOUR EMPLOYER contributions to a Traditional IRA.
WHY? Because employer contributions have yet to be taxed.
If your employer DOES NOT contribute to your Roth 401(k), then you could do a direct rollover to a Roth IRA. Roth to Roth will not be subject to taxes.
This image below should help.
Doing this rollover might seem like a pain in the ass. And that’s because it is. Rolling over a 401(k) takes a lot of phone calls and faxing of information. And let’s be real, who has a fax? My mom. My mom has a fax.
But what if someone could do it all for you?
Capitalize will do ALL of it for you for FREE. Seems sketchy? Okay, that’s fair. Let me share with you how Capitalize makes money. If you choose to open up an IRA with one of the providers on their platform then they may be compensated. This makes it where they can keep their service free for people like you and me, and they still make money. No one is out here doing business for free.
So how do you get started?
I’ll give you step-by-step how to get started with Capitalize. Head to their site here.
Step 1: You’ll want to let Capitalize know where your current 401(k) is. If you don’t know where it is, you’ll enter in your employer’s name and Capitalize will help you locate it. If you do know where it is, you’ll be able to select your provider.
Step 2: You’ll choose what kind of IRA you want. You’ll select if you want a Traditional or Roth IRA, but you’ll also get to choose if you want to invest on your own (Self-Directed IRA) or if you want a Robo-Advisor.
Robo-advisors charge small fees, but create great portfolios based on your current age, risk tolerance, and when you plan to retire.
Step 3: You’ll enter in an email and password for your login. If you have an existing IRA, you will enter in that information. If you don’t, Capitalize will help you create an account.
Capitalize takes care of the rest! They will handle the phone calls, faxing, and everything else needed.
How long does it take to complete a 401(k) rollover? A rollover takes a couple of weeks. Not bad! The process could not be more seamless. But, there’s one last step that is probably the most important step when it comes to completing a 401(k) rollover.
Final step: Invest your money!
Once the funds transfer into your new IRA (or Solo 401k), please INVEST the money! If you don’t purchase funds, your money won’t grow. It will sit there like a lame duck losing purchasing power due to inflation. Your money will not automatically be invested. Capitalize will not invest for you. This is a step you have to do on your own.
If you don’t know what to choose to invest in, then at Step 2, I’d recommend choosing a robo-advisor or researching low cost index funds.
If you have any questions about rolling over an old 401(k) and want to reach out to me personally, you can do so here. I’ll be responding to emails today.
Cheers.
LP
