How To Roll Over 401k To Ira

How To Roll Over 401k To Ira – One of the biggest financial questions working people like you and me face when changing jobs is whether to convert my 401(k) to an IRA.

It’s a BIG decision and not to be taken lightly! The answer could lead to a lost opportunity of hundreds of thousands of dollars later down the road.

How To Roll Over 401k To Ira

Or worse… make one wrong move and you could end up paying the IRS tens of thousands of dollars in taxes you’re not willing to pay. Yes!!!

What Is A Gold Ira Rollover?

I was recently faced with this decision now that I have made some new life changes and decided to change jobs.

I won’t be shy – my 401(k) balance was pretty hefty! 12 years of saving and earning tons of staff matches yields a pretty healthy 6 figure payout.

As I indicated earlier, with large amounts of capital like this, you don’t want to beat around the bush or delay this decision. Your money can be used to earn more money! That’s the beauty of increasing revenue!

So when I weighed my options and asked if I should roll over my 401(k) into an IRA, all the indicators came back with a resounding green light YES!

Ira Rollovers: Why What You Do With Your 401k Is Important

In this post, I’ll explain why and how you can use this thought process to draw your own conclusions if you’re ever faced with a similar opportunity to do a 401(k) to IRA rollover.

Before we get into the main part of why an IRA rollover is a good idea, let’s first review exactly what your 401(k) options are when you leave your job.

About a week after my last day of work, I received a letter explaining that I had the following options:

Note that if you are under 59-1/2, you never want to choose option 4 unless you have fallen on very, very, very hard times financially. (And even then, there are better options you can take.)

Should You Rollover Your Old Or Dormant 401(k)?

Why is it a bad choice? Not only do you destroy your retirement nest egg, but you also have to pay both taxes and a 10% penalty on the balance you withdraw. Think about it: For every $100,000, you’ll likely be hit with a 25% tax ($25,000) and a 10% penalty ($10,000). It pretty much wipes out all your winnings!

Believe it or not, according to a report by the Transamerica Center for Retirement Studies, 25 percent of people have gone this route.

As I mentioned, I’m choosing option 3 (rollover my 401(k) into an IRA with a private institution) over keeping it in the old plan or rolling it over to the company 401(k) plan my new one for several good reasons.

Most people know that when you choose your 401(k) funds, they are not free. There are annual costs that come with owning them. Usually these costs are presented as a percentage called the “cost ratio”. For example, an expense ratio of 0.5% means that every year you pay $500 for every $10,000 you invest in that fund. These costs are paid to the fund company that runs the fund and pays for things like the fund manager, fund transactions, etc.

Backdoor Roth Ira: Advantages And Tax Implications Explained

Well, if you didn’t know, the fun doesn’t stop there. There’s a whole other group of more elusive expenses you pay for when you have a 401(k) called “administrative expenses.” This is a completely separate group of expenses for things like operating the 401(k) fund, accounting, etc. According to Bankrate, these administrative fees can sometimes range from 0.36% to 1.71%.

As you can imagine, once you’re in the six-figure balances, the cumulative 1 and 2% “surcharges” can really start to add up. This will seriously erode the money that should be in your pocket!

To give you an idea, the free personal capital account has a tool that estimates how much money you’ll lose over time as a result of those 401(k) fees over the coming decades. In just 10 years I’m expected to lose up to $85,384! THEY HAVE IT!

So how can we avoid these stupid costs? Simple…don’t keep your money in a 401(k). Take your retirement savings and roll them into an IRA.

Pew Survey Explores Consumer Trend To Roll Over Workplace Savings Into Ira Plans

Look at this. Vanguard charges a 0.17% expense ratio for a simple stock market index fund. If you move over $10,000 you qualify for special ‘Admiral Shares’ and the cost drops further to 0.05%. That’s $50 for every $100,000 you’ve invested.

If your 401(k) was anything like my old plan, it probably only gave you about 20 options – no – to invest in.

I say -bla- because you often hear the complaint that the funds they offer 1) don’t perform that well and 2) have excessively high expense ratios.

While for the most part I recommend just going with the stock market index fund and calling it a day, for more advanced investors paying attention to diversifying your asset allocation can be of great benefit. Check out this post I did here that shows how good asset allocation could have helped stabilize your losses during the Great Recession of 2008.

How Long Does It Take To Rollover A 401k To An Ira?

By rolling over from your 401(k) to your IRA, you open the door to almost any asset available for purchase at the financial institution. In my case, I can invest in almost everything Vanguard has to offer.

That means if I wanted to get into more sector-specific stocks like healthcare or technology, I could!

If you’ve ever followed my plan to retire at age 45, then you know that IRA rollovers have worked all along.

Why? Because to retire early I will use either a 72t IRA ladder or a Backdoor Roth to get early access to my money. Both strategies allow me to start taking early withdrawals from my retirement savings before age 59-1/2 without having to pay a penalty.

Can I Roll A 401k Into A Roth Ira?

Unfortunately, with a 401(k), you can’t use these strategies. This is because when you have your money in a 401(k), your plan administrator (i.e. your employer) must give you access to these types of withdrawals. So if they reject you, you’re out of luck.

While you may not think this is the case at work, you should definitely find out. I was very surprised at my last job to find out that they did not allow early withdrawals or loans from the 401(k).

By rolling over to an IRA, YOU keep all the power (as you should)! You can then give yourself the option to use one of these early access strategies if you want.

Before I wrap things up, I just wanted to make one last point about 401(k) to IRA rollovers and something to watch out for.

The Importance Of Rolling Over A 401k Into An Ira For U.s. Expats: Enhancing Flexibility, Investment Options, And Tax Efficiency

When you roll over your retirement savings, your financial institution will ask if you want to roll over to a Roth IRA instead of a traditional IRA. Do this if you don’t fully understand what you’re getting yourself into.

When you convert from a traditional 401(k) to a Roth IRA, you’re switching from a pre-tax account type to an after-tax account type. Translation: You will pay a lot of money in taxes!

So if you’re not ready to cover that huge tax bill, consider switching from a traditional 401(k) to a traditional IRA. No fees are charged when you do this.

In short, if you ask me if I should roll over my 401(k) into an IRA, for me the answer is an absolute yes!

Why Leaving Behind Your 401(k) Can Hurt You

Being in control of your life savings is an absolute must in my book. This is one thing you seriously don’t want to put off or leave to someone else. Put your money to work in the most efficient way! While it may seem like a chore to roll over from your 401(k) to an IRA, it’s actually a lot easier than you think. Just pick up the phone or jump on your computer and do it.

As we saw above, those 10 minutes or so can add up to tens or even hundreds of thousands of dollars, compounded for retirement later in the years to come.

Readers – How many of you have done a 401(k) to IRA rollover? What were your reasons for doing it (or not doing it)?

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Roth 401(k) To Roth Ira Rollover

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