A 401-K rollover, is not an exercise like P-90X and it is not another futuristic movie title. A401-K rollover is what you do with your company retirement money, when you leave your current job.
Let’s say you have been working at hospital A for twenty years, and have built up a significant amount of money in your 401-K (or 403-B). Now you have been offered a big promotion and raise to work for hospital B.
What do you do with your money? Well, it depends on tons of factors, but lets work through a few of them.
- Your plan at your old company may require you to move your money-most don’t unless it’s less than $5,000.
- If you think the old plan is great, and the hospital is stable, you can leave it there-be sure to keep up with it, with change of address notifications, if you move. You don’t want to lose touch with your money!!
- If you want to move the money, then you need to do a “Rollover”.
So what are your “rollover” choices:
- Have your money “transferred to your new employer. Make sure you like the options in your new employers retirement accounts-if not keep reading.
- Rollover the money into a traditional IRA-either with a brokerage, or a mutual fund company.
- Rollover the money into a Roth IRA.
- Let them send you a check for the money-go have a big party, buy a new car, new clothes and Jimmy Choo’s!
All of the above are fine except the last one! If you take the money and run, your old employer is required to send 20% of the money to the feds for taxes, as they consider this income, and if you are under 59 1/2 they also slap you with a 10% penalty (yes that money is gone) for being stupid!!!!
As to whether to choose a traditional IRA or Roth IRA depends. The advantage of the Roth is that your money when you withdraw it, is tax free. When you withdraw money from a traditional IRA, you pay taxes on the money at whatever rate applies-IF that is very little money, and your income is low, then the taxes may be low.
However, if you spend the next 40 years learning to act and then become a “Millionaire Nurse” then those taxes may be significant. So, if you can afford to pay the taxes on the money now, then conversion to a Roth IRA, I think, is the best decision. Now companies that manage Roth IRA’s, have calculators that you can play with to help with the decision. And you can do both, have part put into a traditional and part a Roth.
But you still are having to “guess” at what you tax rate will be when you retire. And I can only guarantee one thing-the odds of any of us “guessing” correctly is near zero!!! So as I have said before, don’t have paralaysis by analysis, do your best due diligence and homework, then push the damn button! EXECUTE!!! (sorry, but sometime you have to get people’s attention.)
Now to discuss all the implications of buying stocks, mutual funds, and deciding how to invest in your new IRA Rollover is worthy of a book, or at least several posts here-so we will deal with that in the future… I know, you can’t wait!!!
Now, as to how to actually arrange the transfer, you have to be proactive. Call your benefits people at your old employer, and ask them what paper work you need to fill out to move your money. Ask the people that you are moving the money to, what paperwork you will need to fill out, so they can accept the money,-without it disappearing in cyberspace…. So make sure both ends are covered.
If you aren’t sure if you have filled out the forms correctly ask for help-if you can’t get any one to help, then maybe you need your new financial company/brokerage folks to help, or even get an independent financial advisor to do so, and pay them their hourly rate for assistance. Just keep bothering people on both sides of the transaction till it gets done!!!
So let me know your questions or comments. There are plenty of exceptions to the above rules-special circumstances for withdrawal without taxes or penalties, such as disability, etc. So, keep that in mind.
There will always be unusual exceptions. Like the old saying in medicine-when you hear hoof beats, don’t expect to see zebras-but every now and then, a zebra will show up and bite you on your “donkey”….
If you have done a “rollover” let us know how hard or simple it was. What was your experience?
Tags: 401-k facts, 401-k rollover, changing jobs and your 401-k, distribution of 401-k
Millionaire Nurse Blog
Why do you prefer a Roth IRA vs rolling it into the 401 program of the new employer?
I did a rollover. It was just a matter of paperwork. Unfortunately, because I stayed PRN, they wanted their money back. It took about a year, but they transferred my money back to the original hospitals 401
Thanks for the question, J. Most 401-K plans have very limited investment options-usually choosing among a couple of mutual fund options. Money in IRA’s- both Roth and traditional-can be invested among thousands of choices. Even real estate. Now sometimes all those choices make decision making difficult.
But the bottom line is, with an IRA you have more control-that of course can be good and bad…..But that is what we are here for, is to make you competent to help yourself. If you don’t want to learn investing, we want to help you to decide who the best “expert” will be to assist you!
Now that was informative! I have asked wise heads before if I should do a “rollover” and they just say leave it alone. Dumb question, but what percentage of taxes would I have to pay for a Roth IRA?
Thanks L. For the tax question, it is based on your income tax rate. If you check with your tax preparer or the potential Roth source-brokerage or mutual fund company-they can give you a quick guestemate, based on your income.
But keep in mind, once you pay the taxes, you can then remove the money in retirement tax free-that is pretty sweet! You also can rollover a portion of the amount in your 401-k if you can’t afford to pay taxes on all of it.
I think you missed the biggest downfall to 401k plans, expense. Most people have no clue how much their 401k plan is costing them. Yes, they might have a few mutual fund choices and yes, a couple of them have some decent performance numbers but what they don’t realize is the funds in the plan could be costing a lot more than what you could get in an IRA account. There are a high percentage of 401k plans that have some type of asset based fee assessed on top of the internal expense of the funds that are available. People don’t realize this. Most people don’t know what their 401k is costing them and this goes for the old and new 401k. 401k as are awesome, when they work right.
Thanks for reading.
Expenses can be a major cause of under-performance of any investment. The problem for most 401-K plans and employee investors- it is difficult to tease out expenses.
I would say that making sure you maximize your 401-k deposits to take full advantage of your employers match. Then, making a Roth or other IRA investment may make sense if the plan has high expenses. There is a movement to insist that 401-K plans are more forthcoming with expense information for there investors. I certainly support those efforts. More transparency the better, when it comes to expenses.
Great point, and thanks again for stopping by.
I’ve read that courts are more likely to view a 401K as off-limits than an IRA in the event that a person is sued. And there are some financial aid forms that count a portion of an IRA as part of one’s assets while not counting a 401K. I believe this is because a 401K is essentially the same as a pension while an IRA is a bit more liquid. Do you have any thoughts on this?
Re financial aid-you do have to report your pre-tax contributions to your 401-K or IRA on FAFSA form B-so it counts as income.
As to the courts and IRA, I am sure that depends on too many circumstances to deal with here. Always worth checking with a tax adviser.
But again, don’t be frozen by fear and do neither…..
Thanks for stopping by.