A 401(k) retirement account is one of the best things to have to build your wealth and save for your retirement.
When you leave your job and transition into a new one, your previous 401(k) can be left behind and forgotten about.
This is the last thing that you want to happen, as you could end up losing thousands of dollars in fees and losing your hard-earned income.
In this article, we’ll look at the steps for how to rollover your 401(k) accounts like a pro.
If you want the quick and easy answer we recommend using Capitalize to help you rollover your 401k.
Table of Contents
What Is A Rollover?
A 401(k) rollover is where you essentially move your funds to a new account, which will make sense if you want to grow your investment funds.
This is usually done when you are moving jobs and want to move your previous employer’s 401(k) account into a new one.
How to Rollover 401(k) Plans
Here’s how to do a 401(k) rollover in 5 easy steps:
1. Research Your Investment Options
If you have decided to roll over your 401(k) retirement account, it’s time to look at your options to see what will be the best for you.
There are 2 main options. You can either roll the old 401(k) into a new employer’s 401(k) plan or move it to an IRA.
The one that you pick will depend on your personal situation and what you want to gain from this rollover.
You can also do this yourself or have someone else manage it for you.
If you want to do it yourself, you can open an IRA account or switch to your new employer’s 401(k) plan.
If you want someone else to manage your money, then you’ll want to look at IRA accounts with a robo-advisor.
It’s also important to check if a better idea to leave your 401(k) where it is currently. Have a look at what the fees are and if they have better investment options than your rollover options.
2. Figure Out Your Broker or Robo-Advisor: Where Will Your Money Go?
One of the most important parts of a 401(k) rollover is deciding where you want to invest your money. An account with a broker or robo-advisor can give you a larger range of investment choices.
Capitalize
You can use Capitalize to rollover your 401(k) in 3 easy steps. You will need to tell them where your money is currently, choose a new IRA provider, and then they will get in touch with your old 401(k) provider to sort out the rest of the transfer.
Betterment
Did you know that you can rollover your old 401(k) with Betterment? Within your account, you can choose to switch it over into a Traditional or Roth IRA (depending on which one you prefer).
3. Set Up Your Account
Each place has its own way of doing things. Once you have picked a broker or advisor, you’ll be able to find out their procedure for a 401(k) rollover.
You may have to speak to your previous 401(k) provider and let them know about the switch. It’s essential that you get this done correctly! Your new provider should tell you everything that you need to tell them in advance.
But it should be quite straightforward, just tell them the information about the previous 401(k) and your personal relevant information.
4. Get the Ball Rolling
Once you’ve decided that you want to do this, it’s time to put it into action! Don’t forget, there may be a time limit on doing this- the sooner you start, the better.
Direct Rollover
The best option for you will be a direct rollover. A direct rollover is where you have your funds sent straight over from your previous 401(k) into your new account.
It’s really important to make sure that you specifically ask for a direct rollover, as you want to avoid the taxes that will be triggered if you don’t do this. Most accounts have penalty-free withdrawals when you’re age 55 and older, but you’ve got to be sure your request is worded properly to avoid the tax hassle.
Indirect Rollover
An indirect rollover is where you will get the funds, but instead of them going directly into your new account, they will be sent to you via check.
If you do an indirect rollover then you will have to pay income taxes and more, but you can put it into a new IRA within 60 days to avoid all of this.
Most retirement plan advisors say you should avoid removing money from retirement accounts in general, because of fees and expenses, so be sure to take advantage of the 60 days!
5. Don’t Hesitate!
As mentioned, there is a time limit to follow if you want to avoid a tax penalty when moving your old 401(k) over.
It’s important that you make this a priority and get it done as quickly as you’re able to. You will have 60 days to switch your money over to a new provider, so don’t delay!
Already Have A 401(k)?
Do you have an employer 401(k) account set up by your old company? Before you look into a new account of any kind someplace else, think about all your options:
1. If It Ain’t Broke, Don’t Fix It
If you like what you have already, there’s no reason to change things up. You can stay with your current investment option if that’s the right choice for you.
Make sure you check that it’s the best option however and that you don’t want to do it just because it’s boring or seems like too much work (spoiler alert: it’s not!).
Check out the fees and expenses and compare them to what they would be if you did a rollover. Is it better to stay or move?
Also, be sure to check out what the investment options are with the current plan. You may find there are more options if you do a new 401(k) rollover or rollover IRA.
2. IRA: Roll Over To Your Own Pick
With transferring your funds, you need to decide if you’ll use a 401(k) with a new provider or employer or if you want to swap your money from a 401(k) to an IRA instead.
However, it’s important to double-check that you are able to roll your 401(k) to an IRA. Although it should be fine in theory, there are some 401(k) providers who don’t allow this to be done.
There are more investment options when you want a rollover IRA, so this is something that you should also consider. Later we’ll talk about traditional and Roth accounts and some other IRA options.
3. New Employer Options
When you join a new company, see what retirement savings options they have. You can convert your old 401(k) into their investment options, especially if they’re better for you or at a lower cost to you.
Roll Over: Pros And Cons
Pros
1. You Pick The Place
The best thing about switching to a new 401(k) plan is that you will have control over where you want it to go. When you are working somewhere, they will choose the plan for you – but now you will be in control.
Not only that, but you can also choose whether you want to stay with a 401(k) or if you want to change it to an IRA. You are in complete control! It’s always a good idea to be in control of your finances and make the best decisions for you and your life.
2. IRAs Have More Investment Opportunities
If you are choosing to rollover your 401(k) into an IRA, you will have more investment opportunities than with a 401(k)- the top two being traditional and Roth IRA accounts.
If you are looking for more diverse investments, then an IRA can be a better choice for you than staying with a 401(k), whether that is your old one or a new one.
3. Consolidating Your 401(k)s From Previous Jobs
You may find yourself with several 401(k) accounts if you have been in several different jobs.
If this is the case, you may find it confusing to have them scattered all over the place, and hard to keep track of. If that is the case, then you may find it easier to consolidate them into one pot.
4. 401(k)s Can Have Balance Minimums
Your boss may make you move your 401(k) if you have less than $5,000 when leaving their company.
5. Fewer Accounts To Track
Let’s be honest – we all want an easy life. Who has the time to keep track of a bunch of different accounts, when you could just keep them all in one place?
It may require a bit of work up-front on your part but then you can leave it there to grow your money!
Cons
1. You Like What You Have
If you have looked at your previous 401(k) and are happy with what you see, then you may prefer to just stay where you are.
There’s nothing wrong with that – the whole point of rolling over your 401(k) is fixing what doesn’t work for you.
2. 401(k)s Have Some Benefits Over IRAs
If you want to keep your 401(k) instead of having an IRA, please know that there are some benefits of doing so.
Legal Security
Did you know that employer 401(k)’s are protected from lawsuits?
Tax Advantages
With early withdrawal tax, which may be subject to income taxes, you can incur an early withdrawal penalty – you can have penalty-free withdrawals with a 401(k) if your distributions are made to you age 55 and if you have left your employer.
If you want more details on tax penalties, we recommend talking to a tax advisor or other tax professional to decide what’s best for your investment account options.
3. Your 401(k) Could Be A Loan
Did you know that you are able to take a loan through your 401(k) plan? We don’t really recommend doing this – or taking out any kind of debt – but it’s good to know that the option is there, right?
You can only have this option with a 401(k), as an IRA doesn’t offer this option.
4. You Need To Research IRA Options
If you are going to roll your 401(k) over into an IRA, you are going to need to do some research into the various IRA options.
Traditional IRA
With a Traditional IRA, your contributions are tax-deductible. That’s beneficial if you want a tax break sooner rather than later. You do have to take required minimum distributions from your account beginning at age 72, food for thought.
Roth IRA
With a Roth IRA, your investments will be available to withdraw in your retirement without paying any tax at that time.
SEP IRA
SEP IRAs are only available for your employers to pay into, and the contribution amounts are really high (especially when compared to the other options).
Simple IRA
Simple IRAs have lower contribution limits, but your employer can either match up to 3% of your annual contribution or set up a 2% contribution.
FAQs For Rollovers
Is there a timeframe to roll over my 401(k)?
Yes, there is a timeframe in which you have to roll over your 401(k), which is important to consider when moving your money, although it depends on how much you have in there.
If you have more than $5,000 in your 401(k) with a previous employer, then there is no time limit in general.
However, you have 6o days to roll it over before you incur penalties. That’s why we recommend using a service like Capitalize or investment platforms like Acorns to get your rollover started without any of the stress.
Are there penalties to rolling over into an IRA?
You can rollover a 401(k) into an IRA without penalty, but if you are rolling it from a 401(k) to a Roth IRA then there will be tax to pay.
Is a rollover IRA better than my 401(k)?
Whether you go for an IRA or 401(k) will depend on what you wish to get out of it. You need to think about whether it’s worth staying or moving money over.
If you are happy with your 401(k), then there is no reason for you to move it over. However, make sure you look at the fees involved and decide if you want to have more investing options.
What about paying taxes on a rollover?
Whether you pay taxes on a rollover depends on what type of account you are going to be rolling it over into. Typically putting your money into a Roth IRA is the one that will incur tax.
You don’t want to create a tax liability after things are said and done in a new retirement account, but this should be fine if you’re rolling over a 401(k) into an IRA.
Should I cash out my 401(k) instead of rolling over?
If you want to cash out your 401(k), then you will be liable for income tax on it. If you want to build wealth and avoid paying income tax, it will be better to roll over in most cases.
What about my employee stock?
If you are rolling over your 401(k), you will want to check if there is are any company stock in there.
If there is, you shouldn’t just roll this straight over. Instead, you can move the company stock to a brokerage so that you can pay some tax on it straight away.
Our Thoughts
When you change jobs, thinking about what to do with your 401(k) is really important, and should be at the top of your priorities.
You will need to take a look at where it’s at currently and what kind of fees you are paying. You will then need to look into whether it will be worth it for you to roll it over or not.
Whatever you decide, make sure you are doing it for the right reasons – namely, to make things easier for yourself, and reducing your fees.
Click here to start your stress-free 401k rollover now with Capitalize.
