Rolling your 401(k)
One of the most important parts of losing a job or taking on a new job and leaving your current employer will come around moving the pile of cash you have accumulated in your 401(k). Below I have outlined the things to keep in mind through-out the process.
1. Should you roll your 401(k) into an IRA or your new employers 401(k)
Are you transitioning directly into a new job?
Your best option if you are changing employers is to roll your 401(k) money into an IRA. An IRA will give you the best investment options and will allow complete management of your funds. There is little to no benefit to rolling your old 401(k) to your new 401(k) as most investments inside of employer 401(k)’s are awful (7 is the average number of options and the quality is poor).Did you unexpectedly lose your job?
If you have lost your job, you will have to roll your 401(k) into an IRA. This is because you only have 60 days to roll over your 401(k) and you might not have a new employers 401(k) to roll over to within that period.
2. You have 60-days to move your 401(k). Do not let this slip or your 401(k) will be penalized and taxed.
3. Use a trustee-to-trustee (think bank-to-bank) transfer to avoid paper work, hassle and a potential 20% withholding tax.
4. It will generally take 4 to 6 weeks to get your current 401(k) money transferred. After this, REMEMBER, that you will need to allocate this money into the new investment options.
I went through this process about a year and a half ago and it was fairly simple. The keys are to start early and see the process all the way through.
These are the basic things to know - does anyone have questions on this? Does anyone have advice to add if you’ve been through this before?
Good timing on the 401K talk because I had a meeting at work today about signing up for our plan. I was completely lost in the meeting so hopefully you guys can help. Should I only put in as much as the company is matching and then invest elsewhere?
Also an idea for a blog post, Auto Insurance, how much coverage is needed and is 1 company better than the others?
Scott - Good to hear this will help you. Please consult Brad’s post here: http://www.twentysomethingsense.com/2008/12/bye-bye-match.html
Check-out the 5 options in order at the bottom of the post. If you follow this, you should be good to go.
If you have more questions feel free to post or email! Cheers.
I read your blog about the 60 day timeline on rollovers following unexpected layoffs and am in the process of going through this myself. I spoke w/an adviser w/Charles Schwab today and she provided some information that I thought I’d share. I have had my 401k w/them for the past three years and she indicated that there was no timeline for me to rollover my 401k; I can take my time to decide if I want to put it in an IRA or another company 401k. The only requirement for me to leave it w/them in my current account is that the balance remain above 5k. Am I missing something?
Hi Melissa -
So if I have this straight, Schwab is managing your 401k which had nothing to do with your previous employer - is this correct?
Assuming that is correct, the reason you don’t have a time restriction is because it sounds like your 401k is outside of a specific company run 401k. Therefore, the money can stay put or be rolled into an IRA or your next employers plan.
If it were in a specific company run 401k, this is where the 60-day time frame can come into play. The 60-days is a general rule, but this is different per employer and per 401k management company.
I hope this helps!