401(k) Rollovers: The Ultimate Guide

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  • 401(k) Rollovers: The Ultimate Guide
Author: Joseph Reinke, CFA

Many of us have a 401(k) which is a good thing. However, once we leave our employer we make the mistake of leaving the 401(k) with our old employer.  Instead, you should do a 401(k) rollover.

In this guide, you will learn about 401(k) rollovers, how to do one, and if you should rollover your money or not.  If you are just starting your journey to understanding 401(k)s, the check out our beginners guide to 401(k)s

In addition, after reading this article and our beginners guide, if you still have questions, be sure to check out our investment technology and our financial management platform whereby our Coaches are standing by waiting to answer your questions.

What is a 401(k) Rollover

A 401k rollover is available to you once you leave your current job.  Typically, you rollover your money into an individual retirement account (IRA) which is what we typically recommend doing.  This is called “taking your money with you” and I discuss the benefit of doing this later on in the article.

In short, a 401k rollover simply means moving your money from one place to another because you view one location more favorably than the other.

Note: Some companies allow you to do an in-service rollover. However, most don’t and you often times have to be older than 55.

401(k) Rollover Options

There are for main options you have when you leave your employer:

  1. Rollover your 401(k) to a Traditional IRA
  2. Rollover your 401(k) and do a Roth Conversion
  3. Rollover your old 401(k) into your new employer’s 401(k) plan
  4. Keep your old 401(k) with your former employer
  5. Cash out your 401(k)

As I mentioned earlier, you’ll most likely want to rollover your 401(k) to an IRA.  There are 3 primary reasons:

  • Cost: 401(k)s are expensive because of management fees and custodial accounts. Typically, you will pay between 1% and 1.5% of your assets per year in a 401k.  That means for every $10,000 you have invested, you’ll pay between $100 and $150 per year.  Even worse, the ‘services’ you get for those fees aren’t good.
  • Options: Most 401(k)s limit you what you can invest in.  In fact, most only have between 5 and 20 investment options.  When you do a 401(k) rollover to an IRA, you can invest in a number of options ranging from stocks to real estate.
  • Keep Favorable Tax Treatment: When you rollover your 401(k) to an IRA you are eligible to keep the same tax treatment.  Whereas if you cash it out, you’ll have to pay taxes and penalties if you are under 59 years of age.

401(k) Rollover To IRA

When you do a 401(k) rollover, you have to make sure you are rolling it to the appropriate type of account.  If you open the wrong type of account, you may be taxed and it will cost you a lot of money.  This is one of the primary items our FitBUX Coaches help our Members do, i.e. make sure the rollover is going to the right place!

Below are the three primary choices you have.  Most people will choose between the first two options. However, the 3rd option makes since in special situations.

  • If you have a traditional 401(k) then you can open up a Traditional IRA. ‘Traditional’ means that your contributions to your 401(k) where before taxes.  By doing a rollover to a traditional IRA, you won’t have to pay any taxes until you withdraw the money out of the account.
  • If you have a Roth 401(k) you can open up a Roth IRA to roll the funds into.  Again, doing so will keep your current tax status and you won’t pay any penalties.
  • Traditional 401(k) to Roth IRA. When you pursue this option, you will pay a tax on the amount you rollover. However, there are times where this makes since to do. However, you’ll need to speak with an accountant because everyone’s situation is different.

Best Place To A Rollover 401(k)

There are many places you can rollover a 401(k) to in regards to companies.  However, there are four general categories each of these companies fall into.

  • RIA: RIA stands for registered investment advisor.  They will charge you between 1% and 2% of your assets each year to manage your money. I personally do not think they are worth it. However, it is better than leaving your money in your existing 401(k) because you are most likely paying the same amount but getting zero service for the money you pay.
  • Robo-Advisor: These are low cost investment company were algorithms determine your investment.  Robo-advisors don’t take into account your entire financial profile.  Therefore, I view most as being inappropriate.
  • DIY: Do-it-yourself options are the cheapest way to go. In fact, you shouldn’t have to pay anything. However, you are then responsible to choosing the right allocation for your investments by yourself.  About 30% of FitBUX Members choose this option.
  • Hybrid Robo-Advisor: There are multiple problems with the options above. Primary problems include costs, not looking at your complete financial profile which includes items like debt and human capital, and time you have to spend doing it.  Hybrid solutions, such as FitBUX’s investment technology, combines Robo-advisors, artificial intelligence, and FitBUX Coaches.  Therefore, you can invest cheaply, have technology that looks at your entire finance profile, and if you have questions there is an expert there for you to speak with.  The cost is less than an RIA and a little bit more than a Robo-Advisor.

How To Do A 401(k) Rollover To An IRA

If you decide to do a 401(k) rollover to an IRA, the steps you should take are listed below.  Side Note: I’m biased but I think to make it a lot easier, you should open the account with FitBUX and we’ll make sure you do everything correct!

  1. Figure out if you have a traditional 401(k) or a Roth 401(k)
  2. Decide which type of account you want to roll the money into (IRA or ROTH IRA)
  3. Decide where you want to roll the money to (RIA, Robo-Advisor, DIY, Hybrid like FitBUX)
  4. Open the IRA account
  5. Choose your investment allocation
  6. Request the 401(k) company to roll over the funds to your IRA by completing their forms
  7. Step 7 is different for everyone. Some 401(k) companies will send the money straight to the company you opened the rollover IRA with.  If they do that, you just need to follow up to make sure the transaction was completed.  Other companies will send you the check.  If they do that, you have 60 days to send the money to the Company you opened the rollover IRA with.

Rapid Fire FAQ

Is a rollover IRA the same as a 401(k)?

Yes from the stand point of taxes as long as it’s a similar type of account. For example, if you have a traditional 401(k) and rollover the funds to a traditional IRA, then yes they are the same thing from a tax perspective.

No from the perspective of contributions, who controls it, and investment options.  Contribution limits are different. For example, once you leave your employer you can’t contribute to the 401(k) anymore.  Also, your former employer controls what investment options you have.  In a rollover IRA you control it.  Also, the cost of a rollover IRA can be significantly lower than a 401(k)

Can I contribute to a rollover IRA?

Yes you can. However, you must comply with contribution laws.

Can I rollover more than one 401(k) into the same IRA?

Yes, in fact this is one of the most frequent things we do at FitBUX.  People tend to leave their employer and do multiple rollovers into multiple accounts and it gets confusing for them.  You absolutely can roll them all into one account so its easier for you to manage your money.  This is part of having money complement your life and not dictate it, i.e. less for you to have to organize!

Does my rollover count as an annual contribution?

No, you can still contribute money to your IRA the year you do the rollover up to contribution limits.

What are the downsides of doing a 401(k) rollover?

There are two primary benefits to keeping your money in a 401(k):

  • There are protections you receive in bankruptcy and from creditors if you leave your money in a 401(k).
  • Most 401(k)s allow you to lend from your 401(k). IRAs do not have this feature.

What is the difference between a rollover IRA and a ROTH IRA?

How the funds are taxed when they are contributed to the accounts and how they are taxed when they are withdrawn.

Note: If you have a rollover Roth IRA then it’s the same thing as a Roth IRA.

Do I need to report my 401k to IRA rollover on my taxes?

Rollovers are exempt from taxes when you place the funds in a similar IRA account within 60 days of distribution.  You should receive a Form 1099-R reporting the distribution that you include with your taxes so the government can keep track of it and you can keep track of past contributions.

By Joseph Reinke, CFA

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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