How to Rollover Your 401(k) When You Retire or Leave a Job

If you are retiring or leaving a job, you need to decide what to do with your 401(k). In most cases you will want to rollover (transfer) your 401(k) into an IRA or Roth IRA.

Pros and  Cons of a Rollover

Some companies actually require that you do a rollover at retirement and most financial experts suggest that rolling over is a good idea in order to gain maximum control over your retirement funds.

Advantages to doing the Rollover:

• While company plans are increasing investment options, rollovers typically provide more flexibility in how you can allocate and use the money. You can rollover your funds into an investment vehicle suited to your particular situation.
• Puts you in charge of your account. Even if you like your current 401(k) plan, there are no guarantees that your employer will stick with that platform. Plus, what if your employer were to go out of business, merge with another company or endure some other event that could potentially impact your 401(k) funds.
• Gives you more control over when and how you can withdraw money and manage your account. (Employer sponsored 401(k)s often have limits on when you can do this — even limiting which holdings you can and can not sell.)
• Offers you the ability to consolidate all of your 401(k) accounts into one IRA. Many retirees have 401(k)s at various companies. This money will be easier to manage in retirement if you consolidate it in one place – even if it is invested in different types of financial products.
• Saves money. According to the Department of Labor, a 1% increase in fees could reduce your retirement account balance by 28%. Be sure to compare the fees associated with with your 401(k) to those you might be paying in your rollover account.

Disadvantages

While it is usually a good idea to rollover, sometimes it makes sense to leave your money in the 401(k). 

• Sometimes 401(k) plans have access to institutional-class funds that charge lower fees than similar retail options.
• You want to be careful about how you invest the money in the IRA or Roth IRA and avoid high-cost investments and sub-par returns.
• Your 401(k) might offer benefits that an IRA does not have — like early withdrawals.
• If you are still working, you are not required to take RMDs from your 401(k).
• You can not typically take a loan from an IRA, but you can usually do so from a 401(k).

How to Do a Rollover

1. Think About Your Objectives for the Rollover IRA

Before initiating a rollover, you will want to think about how you want to invest your 401(k) savings.  Do you want to invest in stocks, funds, an annuity or some other investment option?

2. Own Company Stock? Consider Net Unrealized Appreciation

 If you have company stock in a 401(k), you will want to learn about Net Unrealized Appreciation (NUA) and how to minimize taxes when you rollover these funds to an IRA. Learn more here.

3. Choose an Appropriate Brokerage, Roboadvisor or Bank and Open an IRA Account

Once you have answered this question, you can figure out which type of financial institution will be best for your needs. You can choose an appropriate brokerage or bank and open your IRA account. While it is possible to withdraw the funds from your 401(k) and then open up an IRA, it is safer to do a direct rollover —  meaning you open an IRA first and then transfer your 401(k) money directly into the new account.

4. Contact Your Previous Employer and Ask Them to Start the Rollover

Once you have an IRA account, you can contact your previous employer and ask them to begin the rollover process.

5. Assess Whether to Keep Funds in the New IRA or Transfer to a Roth IRA

While you can not rollover funds directly into a Roth IRA, you can rollover into a traditional IRA and then convert that money into a Roth IRA. Roth IRAs have some very big advantages over traditional IRAs related to taxes and withdrawals. Tax Treatment:

• Money in a traditional IRA grows tax deferred, meaning that you pay taxes on the money when you withdraw the funds (and no taxes at all when you invest the money).
• Money in a Roth account grows tax free. You will owe zero taxes when you withdraw the funds — no matter how much the account has grown. However, you must pay taxes when you convert money from a traditional IRA to a Roth IRA.

Withdrawals:

• You must take Required Minimum Withdrawals from your IRA starting at age 72.
• Roth IRAs do not have Required Minimum Distributions (RMD).

Learn more about Roth Conversions or try it out in your plan using the Boldin Retirement Planner.

6. Once Funds Have Settled, Make Investments

Once you have completed  your rollover (and Roth conversion, if applicable), you want to make sure that you invest it appropriately as soon as it makes sense.

Need Help with Making Decisions About Rollovers?

Rollovers are a big financial move and a great opportunity to get professional advice on your investment strategies. It can be useful and reassuring to model different financial moves in the Boldin Retirement Planner or consult with a Certified Financial Advisor. Did you know that Boldin offers flat fee advisory services? You can collaborate with a Certified Financial Planner who has taken a fiduciary oath and specializes in retirement. Your advisor will:

• Review your Boldin plan to quickly understand your circumstances and make sure it is set up properly.
• Help you establish goals and identify ways to strengthen your finances.
• Meet with you via phone or video call to discuss your goals and suggest ideas for how to do better.
• Provide ongoing support.

Click here if you would like to learn more about Boldin Advisors.