Planner’s Corner is a series of posts on financial planning topics that relate to personal experiences, preferences and opinions of the author. As with any content on this site, nothing is intended to be personal financial advice, that is after all, personal. The author recommends a fee-only CFP® for your personal plan.
Having just completed a rollover myself, I have a few thoughts. I was on the fence for a few years and I will explain why. There are several things to consider and like any planning topic, there is no magic rule of thumb.
The concept itself is fairly simple. You open a traditional IRA with your current brokerage, they will typically even refer to it as a “Rollover IRA” so everyone is clear on the purpose. If your 401(k) happens to be managed by that same brokerage, say Fidelity for example, they can initiate the rollover process and it is that much easier.
Most likely your 401(k) will reside with another firm, selected by your employer, and they will need to initiate the rollover once you have the IRA open and ready to fund.
In my case, I was able to open a Rollover IRA with my current brokerage Fidelity and visit my former employer’s 401(k) website to initiate the process. I was able to complete it online in a very straightforward manner that walked me through the process.
Spend a lot of time on your brokerage website which will be accepting the rollover to fully understand their process. Fidelity did a very nice job of outlining the transfer options, wire instructions, etc. Ditto for your 401(k), make sure you understand the transfer process on that end.
In most cases your employer’s custodian will mail a check to you. Fidelity was very clear how the check needed to made out and I was able to enter that payee information while filling out the request online with my employer’s custodian. When the check arrived, I was able to take a picture of it within the Fidelity Mobile App, deposit the check to the Rollover IRA just like you would depositing a check to your local bank. It was truly that simple.
Don’t delay getting the funds deposited. If for some reason the check is payable directly to you it will be considered an early distribution, fully taxable and penalized, if the funds are not deposited within 60 days.
My funds were available to invest inside my new Rollover IRA within a couple of days. I was very pleased (i.e. translated as amazed) how seamless it was. Bottom line this is a very common transaction. I never spoke with a soul, however this is the time to pick up the phone if you are not sure about something or the online process has any gaps. Moving large sums around like this can be intimidating.
when it makes sense
Too many leftover lingering accounts. Keep in mind this is a personal choice. If you meet the account minimums with former employers, no matter how many you have, you can always keep the money where it is. The problem lies with proper management of those funds. Consolidating to one account can be managed more effectively, either by you or a pro.
Limited investing options. Employer sponsored offerings can be a little narrow when it comes to investment options. If you have been “auto-enrolled” at some point, chances are you are in a target date fund which can get the job done but an IRA opens the door to much more flexibility.
You want more control. Once the money is in the IRA, you really have flexibility on how it gets invested and allocated. ETF’s, stocks, bonds, mutual funds, you decide.
Expenses are too high. Many people have no clue how much it actually costs to participate in their employer sponsored plan. Trust me, it is not free. It may be competitive if you are lucky but there could also be loaded mutual funds straight from the 90’s or high management fees where ETF’s could suffice at much lower costs.
You want to get smaller. This was my reason. I had too many logins, too many passwords, too many websites to keep track of and this was an easy option to eliminate a couple. I felt better immediately.
when it may not make sense
A cradle to grave employer. Perhaps you only have one 401(k) and you are totally fine with the investment options provided to you. You like the fact your employer is overseeing it and are comfortable dealing with them. Comfortable being the key word and peace of mind is worth a lot.
Good investment options. This kept me on the fence also because my employer offered a “self-directed” brokerage option within the 401(k). I was able to direct a percentage of funds there and invest as I pleased using stocks and ETFs. I also loved that particular brokerage’s mobile app. This made my rollover decision a bit tougher.
The Rule of 55. Click the link to learn more, but the gist is once you turn 55 and leave your job you are able to access your 401k funds sans the 10% penalty if you go about it a certain way. For early retirees or those considering leaving before the magic age of 59 1/2, this is a rule you want to at least familiarize yourself with. It’s not for everyone, but for some it may make sense and may be a reason to leave money in your 401(k).
There is a similar method to access funds from an IRA called a 72(t), it’s just a bit more complicated.
on balance
Rollover IRA’s for 401(k)s can make a lot of sense for anyone wanting to consolidate and simplify account access and potentially increase their investment options.
There are very specific rules that must be followed to avoid any tax implications but this is a common transaction all brokerages are familiar with and can assist with. A direct rollover is the preferred option where funds are transferred – directly – between custodians.
It’s also a personal choice. As long as account minimums are met, former employers will normally allow indefinite access to your plan. If you are comfortable with the investment options and expenses are in line, there may be no reason to act at all.
For me personally it was a matter of closing a relationship with a former employer and just trying to get smaller! I wanted more control over the funds and I wanted to get rid of some accounts, logins and passwords. It made sense to get off the fence and pull the trigger. I am glad I did.
The Finance Stance 