Dec. 12, 2018
1782 words long, 8 minute read
If you have ever left a job where you were contributing to a 401k, you have the option of rolling it over into another account. Please not that you can only rollover after you have severed ties with a job. In my experience, someone from benefits or HR at my previous employer reached out and asked if I wanted to move my investments. Whether you need to be proactive about moving your money is likely dependent on the job, so you may need to reach out yourself to get the information you need to get everything squared away.
Anytime I have had to do something with my 401k after leaving a job I have found the process really murky and difficult to figure out the right steps, which is why I wrote this guide. It took me a couple weeks of getting the run around to figure out if I could transfer into accounts, what my investment options were, etc. before I actually did anything with my 401k. I will walk you through the couple options you have and some suggestions on what I would choose to do to make my life easier if I had to do it all over again.
There are a couple possible benefits of rolling over your 401k. I think the benefits largely fall into a few reasons:
I think having all of your accounts in one place is a benefit because it makes it easier to track of all of your investments. Some people may have the mental capacity for managing accounts with 4 or 5 different brokers or service providers, but I do not. I personally like to have the majority of my investments in Vanguard where I know I can easily keep an eye on everything in one spot.
Another reason for rolling your 401k over is in the event that your past employer's account has a lot of fees associated with the investments they offer or even a yearly management fee. I have seen of people talking about their 401k provider only offering index funds that are over 1% annual fee, which sounds small but makes a huge difference in the long run. If that sounds like your provider, moving your money elsewhere to somewhere like Vanguard can be a huge win for you to keep more of your returns and make a lot more money in the long run.
To show how much even a 1% difference in fees can be we will run through a hypothetical scenario below. Let's assume that both of the accounts in our scenario return 4% a year and we have $20,000 currently. If the funds have an expense ratio of 1% higher, that means effectively our 4% turns into 3%. After 20 years, the account that has higher fees mean we have over $7,500 less in that account than if we rolled it into another and did nothing. If you go on a longer time scale the numbers get even bigger.
The account returning 4%
Starting amount: $20,000 | Additional yearly: $0 | Growth Rate: 4.0%
Value after 20 years: $43,822.49
The account returning 3% (4% return minus 1% extra in fees)
Starting amount: $20,000 | Additional yearly: $0 | Growth Rate: 3.0%
Value after 20 years: $36,122.21
If you do things the right way, your rollover will be tax free so you won't have to worry about paying capital gains on the investments sold. It can be a really nice way to move to a new provider or get into funds you've been eyeing up without worrying about any tax implications of moving your money.
Before we jump into the how to's, I wanted to preface that you are not always obligated to move your money anywhere. Even though your past benefits manager may be asking you to move your account off their books, you are in no way obligated to move your money if there is more than $5,000 in the account. This is a law in the United States and you can keep your money in the account as long as you'd like as long as your balance stays above $5,000.
Even though you aren't forced to move it, the service provider may start to assess fees on your account that your employer may have been paying as an employee benefit previously. If you plan on keeping your money with your past employer, make sure to ask about any fees associated with the account. You don't want to be surprised a year later seeing that all your gains are gone because of a high maintenance fee on the account you didn't know about.
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The first step to getting everything going is to talk to your old employer. Quite often you have to talk to benefits to get the information you need to get the money out of the account. This should be a pretty common occurrence for them and most of the time they are pretty knowledgeable about making sure things go smoothly. The information I would specifically ask for (even if you think you already know it) are:
These questions should give you all of the information you need to get the ball moving. I particularly like to ask if there is a number for a representative for your previous employer as it can save you a ton of time waiting to be connected via the normal 1-800 number. If you can get a direct line to the company rep, that is the best number you can get.
Some account have a fee associated with doing a rollover. Normally this is pretty small (I paid ~$60) , but I believe pretty common. Don't be surprised if in the terms of service you signed when starting up your 401k, you signed something that says you'll pay $50 to get access to your own money.
I put the last question in there in case you were on the fence about moving your money. If the fees seem low to you, feel free to keep your money with your old employer.
Now that you have the information you need from your old employer, you need to figure out where you want to put your money to work. Here are some of the most common options:
If you already have retirement accounts with a new employer, you can sometimes have the option of rolling over your money into your new retirement account. To see if this is possible, contact your benefits administrator at your new job and ask them if they allow rollovers into your accounts. If they do, ask them for the following information:
They should have all of the information above other than maybe your account number. If they don't know or have access to your account number reach out to the service provider for that information. Having all of the above info is key as the provider from your previous employer is likely going to ask you all these things so they know where to send the money.
If you already have an IRA on your own, you should be able to roll over your money into your IRA. I personally did not have one, but instead decided to open one with Vanguard just to conduct a rollover. If you don't have an IRA for yourself, I highly recommend Vanguard as it was painless, they gave me the information I needed, and there are no maintenance fees. If you are rolling over into your own IRA you need the following:
It's pretty similar to rolling your money into your new employer plan, minus the employer plan number. Basically the old 401k provider needs to know where to send the money. If you don't have an IRA already, find somewhere to get one set up and then get the information above.
You've got all the prep work done it's time to put your plan into action. Take all of the information you've gathered and get read to sit on the phone for a bit. The whole process took me around 1 and 1/2 hours once I had all the information ready to go, mostly because I was on hold waiting for a rep. Here's the steps I took:
It's a pretty straightforward process. I called my the 401k provider for my previous company and told them I wanted to do a rollover. They asked where I wanted to send the money and if I was alright with a fee ($60) for doing a transfer out. I had all my information ready to go and it was relatively painless.
Calling the provider where you are rolling money into isn't 100% necessary, but I did it anyways to give them the heads up that they should be expecting a check for me. I'm not sure if it really did anything, but it did give me some piece of mind and gave me another chance to double check that I was doing everything correctly.
Once you have executed your plan, you basically have to sit and wait. It depends on the process, but normally the old service provider sells your funds, cuts a check, and sends it to the company where you are doing your rollover. The wait times are all dependent on both providers processing times. I would think at least 1 week is pretty normal before I would call in and check on things. Once the check got there, I received an email that I had funds and could then choose where to invest my newly rolled over cash.
Are you rolling over your 401k? Have a question or another experience? I would love to hear it!