What To Do With An Old 401k

401k savings ira nest egg

car rolloverRight now, there are hundreds of millions of dollars sitting in old, perhaps forgotten about, 401(k)s. While you could be managing your own money, your assets earn a laughable rate while fees eat away at your retirement funds. Why people leave assets in 401(k)s when they are eligible to move the funds is anybody’s guess, but it’s most likely one of three reasons:

They don’t know how to move the money into an IRA account, they don’t know that the money can be rolled over into an eligible account with no tax penalty or they fear managing their own assets and think the 401k managers will do a better job

Why you should rollover your 401(k)

Before I get into the how, we need to discuss why you should move your money into an IRA.

  • Investment choices. There are thousands of investment options in a self-directed IRA vs. dozens in a 401(k) plan.
  • Faster execution. IRA transactions are real-time whereas 401(k) adjustments could take days or weeks.
  • Consolidation. Multiple 401(k)s can be moved into the same IRA account. On top of that, you can add your yearly contribution to the same funds. Logging into one account and dealing with one broker is very convenient.

How to move your 401(k)

Transferring a 401(k) into a qualified plan is incredibly easy and it can be accomplished in just two easy steps.

  1. Open a qualified plan with a brokerage firm. See my recent post to find out what broker is right for you. What is a qualified plan you ask? Good question. A qualified plan is an IRA account that matches the type of 401(k) you hold. If you have a standard (traditional) 401(k), those assets should be transferred into a traditional IRA account. This money has not been taxed yet, but will once you start taking the money out. On the other hand, if you’ve started a Roth 401(k) with your employer, you must move these funds into a Roth IRA. Unlike a traditional IRA, taxes have already been deducted and the IRS will not touch it again.
  2. Contact your 401(k) provider and tell them you want to rollover your 401(k) to a broker. Depending on who handles your 401(k), this could be a simple process and verbal instructions will do or they could make it a little harder on you and have you fill out rollover paperwork. Either way, you will have to give them the name of your new broker (the custodian), the account number of your IRA and the address to mail the check to. It’s best not to take possession of the check yourself, so give them the address of your local brokerage office.

Tax implications

There aren’t any as long as you move the money into the same type of retirement plan as I discussed above. Both the sending and receiving firm will be verifying this information, so it’s pretty hard to mess up.

Managing your own money

If you think that your 401(k) asset manager is actively watching your assets and reallocating them based on your future goals, I’m sorry to inform you that there is no asset manager. Within your 401(k) you may own some mutual funds that are actively managed, but these same exact same funds can be purchased through a broker or they could be swapped to comparable funds with lower fees.

For some people, handling their own investments can seem like a frightening and daunting task. As a financial professional, I often forget just how intimidating investing can be. Every day, I see the same concepts and scenarios, causing most actions to be performed out of habit.

Most brokers are starting to realize that people need some assistance so many tools have been developed to help you in many ways. It’s now common for firms to offer a portfolio manager tool that will help you plan out your investment goals and the type of investments that will get you to where you need to be. If you’d rather not learn on your own and trade online, choose a broker with local offices and a high customer service rating. Believe it or not, they will teach you how to use their tools and walk you through the process, completely free of charge.

READERS: Do you have an old 401(k) that is still sitting in mutual funds? If you haven’t already transferred to a self-directed IRA, what’s stopping you?