In 2014, my wife Nicole and I both started new careers. She moved from corporate recruiting into the role of Stay-at-Home Mom when our son Calvin was born. I moved to a new marketing agency to advance my career in account management.
After Nicole and I partnered together to pay off all of our debt, this single income life was something we were prepared for. It wasn’t an easy financial change, but it was completely worth it in our opinion.
With those new role changes we not only left old jobs behind, but we also left old 401k accounts behind as well. Since we both had been at our previous jobs for a while, the idea of rolling over our 401k accounts was new to us. We heard that we were definitely “supposed to” do the rollover immediately, but we didn’t really know why.
Following the “supposed to” advice, I decided to move forward with rolling over both of our 401k accounts into IRAs.
There have been times where I’ve looked back on some of the financial moves I made in my 20’s and 30’s and I shake my head in disappointment. This was not one of them. I’m so glad we decided to roll over the 401k accounts.
When I look back on the few hours of work I put into this rollover process, here are the reasons why I’m happy I listened to the “supposed to” crowd:
I found that the fees associated with my previous 401k were much higher than the fees in my IRA. One percent here and a half percent there might not seem like a lot, but after doing some calculations, I now understand the real impact that fees can have on my retirement savings.
The chart below illustrates the impact of a fund with a 1% expense ratio versus a fund with a 0.14% expense ratio.
As you can see, the difference can really add up. Over $250,000 was definitely worth it for me at least!
No Additional 401k Contributions
After moving to my new company, I realized something about my old 401k. I couldn’t contribute to it anymore!
Without my former company 401k match and the ability to contribute to it on a regular basis, this account wasn’t going to grow very much. It was time to roll that sucker over.
Simplify the Portfolio
Another major benefit of rolling over the 401k accounts was the simplification that came with our updated portfolio.
Before we did the move …
- Nicole’s 401k was with JP Morgan
- My 401k was with Lincoln Financial
- Our IRA accounts were with Fidelity
It was just too many accounts with too many different partners.
When we rolled over the 401k accounts, all of our funds now resided in the same place. Talk about stress reduction.
I could log in to one account and view our entire portfolio in one spot. It felt good to have our finances all neat and tidy. I had a better idea of our future plans, overall growth, and diversification breakdown.
Better Preparation for My Family
Having all of our investment accounts in one spot was definitely a stress reliever for me. I also thought that this new organized account situation would be helpful for my family in case I was to unexpectedly pass away.
Understanding where all our retirement accounts are located would be one less problem Nicole would have to deal with.
With my life insurance, last will and testament and now my consolidated retirement accounts in one place, I felt like I had all of my financial ducks in a row for my family.
How I Rolled Over My 401k
If you’re feeling like rolling over your 401k makes sense, consider consulting with a financial professional to help with the process. There are right ways and wrong ways to go about the process and you want to make you have zero errors — especially when it comes to your life savings!
That all being said, I decided to go through the process myself and it really wasn’t that bad.
Here’s how I rolled over my 401k and Nicole's 401k:
Establish a Rollover IRA
If you don’t already have a relationship with another brokerage firm, consider Vanguard, Fidelity or Schwab. These companies all have excellent low-cost index fund options for you to choose from.
Since Nicole and I were already partners with Fidelity, this part was easier for us. We opened a “Rollover IRA” account with Fidelity and this allowed us to not pay any taxes or any penalties on the rollover.
Perform a “Direct Rollover”
I then touched base with my previous employer and let them know that I’d like to rollover my 401k to an IRA. My former HR rep provided me with the appropriate paperwork to fill out and instructions on delivering the documents to the 401k provider (Lincoln).
I asked for a “direct rollover”. Those two words were very important to the process. This indicated that I DID NOT want to receive the money (big no-no!) and I wanted it to directly rollover to Fidelity.
DO NOT CASH OUT!
CAPS. Exclamation point!!! ! ¡Spanish exclamation point!
I made sure not to cash out my 401k. By cashing out, I would have been hit with an immediate 10% early withdrawal penalty. Additionally, I would’ve had to pay taxes given that my 401k investments were made pre-tax.
By cashing out, I would’ve had an approximate 40% cut to my money immediately. OUCH!
Warning … more exclamation points and caps coming with the next step
DO NOT Have the Check Written in Your Name!
When I was communicating with my previous 401k provider, I made sure the checks were written to the Fidelity and sent directly to Fidelity.
If the check is accidentally sent to you, make sure you get it over to your new brokerage partner as soon as possible. There are penalties for not having the funds allocated quickly enough.
You can also do a “Trustee to Trustee” transfer that helps make this process smooth.
Wait for Rollover IRA Time
Tick tock … Tick tock.
After I initiated the rollover process, my 401k money appeared in my Rollover IRA account in about 7 business days.
When I rolled over Nicole’s 401k, I needed to wait an additional 4 business days for the funds to be “collected” before I could convert it.
As Heinz used to say, good things come to those who wait.
Convert to a Traditional IRA
After the funds were “collected” in my 401k account, I worked with Fidelity to convert my Rollover IRA to a Traditional IRA.
(By the way, Fidelity was extremely helpful during this whole process. It made the rollover a lot easier.)
With my Traditional IRA, I continued to invest pre-tax just like my previous 401k. I wanted to take advantage of investing pre-tax to get a tax deduction for my annual contributions.
Decide Your Investment Direction
After losing faith in my previous financial advisor, I decided that I would try to manage my own retirement investing for a while.
If you don’t feel comfortable managing the investments within your IRA, working with a true professional is a smart move. I’d recommend seeking out a fee-only Certified Financial Planner (CFP) that is a fiduciary. When someone is a fiduciary, that means they have committed to working in the best interest of their clients. Believe it or not, not all financial advisors are fiduciaries. Shocker, right?!
A lot of these reputable folks can be found at Facet Wealth.
Or if you’re game to manage your own portfolio as I did, that can easily be done with the right know-how and research. Index Funds are an excellent place to start. After reading Money: Master the Game by Tony Robbins and The Simple Path to Wealth by JL Collins, I got an appreciation for the benefits of index fund investing and keeping my investments simple.
Are there tax implications when rolling over a 401k to an IRA?
If you’re rolling over a traditional 401k to a rollover IRA (then traditional IRA), there should be no tax implications, but I would highly recommend speaking with a tax or financial professional though.
This is what I have found through my 401k rollover process.