Making Money Moves

The Dreaded 401k Rollover - It's Not That Bad

Can you rollover a 401k to a Roth IRA? What else should you do with it? What if you left it alone? We break down what to do with those 401ks from your previous employers.

How To Rollover a 401k From A Previous Employer

So you quit that job back in 2016. You had a retirement account there (maybe?!) and when you left... you left the account there with it.

Sound familiar?

You're not alone - Reena's done it (twice, actually...). Our friends have done it. Chances are, you've got a 401k account (or an employer pension for those outside the US!) sitting somewhere that you haven't done anything with. That's ok, but forgetting it could cost you up to $700,000 in foregone retirement savings over your lifetime. Sh$t.

Fine, Reena and Becky, we don't want to do that. So now what?

First, let's break it down - what does a rollover into an IRA, Roth, or brokerage mean?

If you have a previous 401k from an employer, you can do what's called a "rollover" - which means to transfer that money into another account. This could be a 401k rollover into a Roth IRA or Traditional IRA.

With your old 401k accounts, you have three options:

  1. Keep doing nothing.
  2. Rollover into your new 401k with your current employer
  3. Rollover into an IRA (an individual retirement account) - Roth or Traditional

Let's talk about Option #1. There's nothing wrong with doing nothing BUT you need to consider a few things:

You're paying high-cost fees for no reason

Fees for 401k accounts range from 0.2% to 5%. If your 401k account is on the higher end, you may want to consider rolling it over to something lower.

Performance is eh... not good...

What does "performing well" even mean? Let's say the market rose by 22% over the past 2-3 years. If your 401k returns don't match that, then it may be worth rolling it over.

You want to invest differently than what your old 401k offers

There's not a ton of control with a 401k. If you want to divest from fossil fuels but your 401k invests in them, there's not much you can do.

Your last company sucked and you literally want nothing to do with them

If you feel this way, get that 401k rolled on outta there. Because you know contacting your old HR is gunna be a pain.

Consolidating means fewer accounts to manage

That also means fewer passwords to remember. It also means not leaving any hard earned $$$ behind because you forgot about a 401k account from some job way back when. That's your money - get it back!!

Ok. I decided I wanted to do a 401k rollover to a Roth IRA, Traditional IRA, or my current employer's 401k (this is a choose your own adventure, FTR).

Now what?!?

Grab yourself a warm beverage and let's break it down, step-by-step. It's pretty painless:

1. Write down every employer you ever had

2. Look up each previous 401k account, the amount and the fees

If you need to reset your password, call the brokerage instead of wrangling your previous employer’s HR. It'll probably be faster. You quit, remember?

3a. If opting for an IRA, open an IRA account

There are a lot out there. Pick one you like, you've used before, your parents recommend, or even a quick Google will give you a comparison chart like this one. Check the fees! Reena loves Wealthfront but that's because she loves the interface and the fees are low. They'll also tell you how to send the rollover.

*There are Roth IRAs and Traditional IRAs. This is beyond the scope of this article but if your income is low enough, a Roth IRA is worth exploring.

3b. If opting to rollover into your current 401k, call them about rolling over your old 401k

They'll tell you if it's an option, if there are any fees, and where to send the check/wire transfer.

4. Call your old 401k brokerage and tell them you want to do a "direct rollover" 

They'll walk you through the steps and any paperwork, then cut a check (or wire transfer) made out to your new account provider. They should mail or wire it to your new provider directly. In some instances, they may have to mail the check to you but be sure the check is made out to your new provider and not you. So long as the check is either sent directly to the new provider, or sent to you but made out to your new provider, it will be considered a "direct rollover." That's good. You want that.

Don't do an "indirect rollover" - this is when you may end up paying extra taxes. It's a headache and we discuss it more down below.

5. Ensure the rollover check/wire is sent to your new IRA or 401k provider

If mailed to you, your new IRA or current 401k will tell you where to mail the check. You have 60 days to get this done* otherwise it's seen as a withdrawal for which you will incur penalties.

6. MOST IMPORTANT for IRAs: Once the money is in the account, select your options and pick your investments. It's not as scary as it sounds - Index Funds are viewed favorably for retirement accounts rather than picking stocks, but hey - you do you. If you choose a roboadvisor then this will (probably) be done for you.

Now, for a brief aside...

Wait... What is an indirect rollover?

We're so glad you asked. An indirect rollover is when your old 401k funds are sent to you, in your name, as opposed to being sent directly to your new provider or made out to them on the check. This is generally not recommended although people have done it if they need a short-term loan.

But there are substantial risks and there are indirect 401k rollover rules you must follow. The most important one being that the indirect rollover must be completed in 60 days.

What happens if you don't rollover your 401k in 60 days?

The short answer?

Dinged on taxes. Plus a 10% penalty on the total amount you withdrew if you're less than 59.5 years old.

The long answer?

There is a 401k rollover time limit. If the check gets sent to you, is addressed in your name instead of your new provider's, or you do an indirect rollover - you have 60 days to deposit it into your IRA (Roth or Traditional) your new 401k, or any other qualified retirement account.

If you do not complete this in 60 days, the IRS is going to come get you. And you won't like it. This is what a 60 day indirect rollover entails; you run the risk of paying taxes and penalties when you didn't need to because the IRS thinks you took that money for something other than your retirement (the fancy word is withdrawal). If you do this before you're 59.5, you get dinged an additional 10% penalty on top of the taxes you have to pay. Yikes.

Can I complete a 401k rollover into a Roth IRA?

Yes, you can rollover a 401k to a Roth IRA as long as you meet the income requirements. There's a lot more to discuss on this and you can find it in one of our upcoming articles.

And that's it. Boom. You did it. Get yourself a blueberry muffin.

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