Recently I made a career move to a new company, so that meant my 401k was now with my ex-employer. Since the funds that were offered in my employer-operated 401k plan were somewhat limited, I wanted to move to an IRA where I would have more options. Not to mention the management fees they were now charging me went way up since I was no longer an employee. So what’s the best way to go about this? An IRA rollover…
An Individual Retirement Arrangement (IRA) rollover is a transfer of funds from a retirement account (usually a 401k or 403b) into a traditional IRA or a Roth IRA. This can occur either through a direct transfer or by a check, which the custodian of the distributing account writes to the account holder who then deposits it into another IRA account.
Read more: IRA Rollover
I would recommend doing a Direct Transfer Full Rollover; that way no taxes are withheld. What ever you do, make sure it is rolled into an IRA or Roth IRA (depending on whether your initial plan was a 401k or Roth 401k, respectively). Do not transfer your funds into an individual brokerage account. If you do, you will have to pay taxes plus a 10% penalty, potentially costing you 35-45% of the balance. Transferring into an individual brokerage account is also considered “cashing out”. Here’s a nice graphic from Fidelity that illustrates the taxes and penalties you would pay.
So how do you initiate a rollover?
The 401k that I rolled over was with Fidelity. I wanted to keep the funds there because I had no other assets currently held by Fidelity (I am trying to spread my assets between a couple institutions to diversify). Here are the steps I took:
Step 1: Open a Fidelity IRA
This is free to do and they do not charge an account fee. Takes about 60 seconds.
Step 2: Initiate a full rollover
Fidelity allows you to rollover your 401k to an IRA for free and it only takes about 2 days. Unfortunately they don’t have an online option to rollover to a different financial institute if you want to go that route (i.e rollover to your Vangaurd account). You have to call and talk to a human (which I tend to avoid, because it typically comes with a sales pitch).
Step 3: Wait until funds are in your new IRA
Some of the mutual funds that I had in my 401k could not be transferred to an IRA, so those funds were sold and now sit in cash that I can re-invest within the IRA account.
Step 4: Make sure your new funds are in investments you want
See why I buy Mutual and Index Funds.
So the rollover process is pretty simple, but it’s a step that many people overlook, and could be costing them a lot of money over the years. Most 401k plans charge fees, limit access to certain funds, and those limited funds usually come with high management fee’s. You get the point…Take advantage of the tax benefits of the 401k that your current employer offers, but don’t hang on to old 401k’s with previous employers.