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The good news is – you can take it with you.  I’m talking, of course, about the money in your old 401(k).

When you leave an employer, one of the key decisions that you have is to determine what to do with the money in your old 401(k).  Considering that for many people, a 401(k) account represents a large chunk of retirement savings, this decision should not be taken lightly. 
 

Essentially, you are faced with four choices:

Let’s deal with happens if you do not want to cash it out.  Many people end up leaving this key retirement investment in their old company’s 401(k) program because they mistakenly believe it’s a hassle to move it and/or there’s no big issue with keeping it in their old plan.  But there are issues … and it’s really not a hassle to roll it over.   In fact, you are likely to be losing return potential if you leave your 401(k) money in your old company plan. 
 

Five Reasons to Rollover

While there are certainly pros and cons to each choice, there are several major advantages to rolling over your old 401(k) savings into an IRA.  Let’s look at the five key reasons to do a rollover:

1.    Broader set of investment options – Don’t settle for less.  Usually a 401(k) plan offers a limited menu of funds.  By moving it to a brokerage IRA, you get access to no-load funds, sector stocks, individual stocks and bonds.  So you can have the freedom to invest in the way that’s best for you.

2.    Lower fees – Leaving your 401(k) money in your old company plan actually costs you money.  The annual administrative costs of a 401(k) can be as high as 2% to 3% of your portfolio.  Rolling it over to an IRA can save money on expenses every year, which adds up over time.

3.    More control, Better access – Put yourself in control.  You can decide how and when to invest your assets with more choices and better control on expenses.  And down the road, should you need to tap into your retirement nest egg early, you can easily withdraw money from an IRA with a simple phone call or form.  (Of course, you may have to pay taxes on your withdrawal depending on your circumstances at the time.)

4.    Ability to combine assets – Simplify your retirement accounts.  You can add your 401(k) assets to an established IRA and consolidate your retirements for better monitoring and easier implementation of asset allocation strategies.

5.    Continued tax deferral – Preserve your tax deferral.  When you roll over assets from your old 401(k) into an IRA, you continue to defer taxes on these assets.  There are no penalties and no loss of capital in moving your assets.

Of course, the above advantages apply to most situations, but your specific situation may require a different approach if, for instance, you have company stock in your old 401(k) with a low cost basis, or you are over 55 years old.  As with any financial move, it is always best to seek professional advice to help with your specific situation.

How to Rollover Your 401(k)

So, how do you do a rollover?  It is usually very simple, and you will need the cooperation of your old employer to get it done.  In general, here are the basic steps; you should, of course, check with your ex-employer to see if there are any slightly different steps they require:
 

1.    Decide where you want the assets to go.  Set up a Rollover IRA at your preferred choice of a brokerage firm, mutual fund or bank. You will receive an account number and an address for delivery of assets.  Your financial advisor can help with this decision.

2.    Contact your former employer – usually an HR person – and request a 401(k) distribution form suitable for a direct rollover of the proceeds from your old 401(k) to an IRA.

3.    Fill out the distribution form and provide instructions to rollover the proceeds directly to your newly-opened account at the address of your custodian.  In this way, the assets from your old 401(k) rollover directly to your new IRA, which preserves the tax-deferred status of your assets.  Submit the form to your former company, keeping copies, of course. 

4.    Check on asset rollover into the new IRA account.  The wait time can range from a week or two to more than a month depending on the speed of the administrator of your old 401(k).  Beyond two months, you probably will need to contact your old company to check on the status of your rollover request.

5.    Re-invest the assets into appropriate investments according to your goals and risk tolerance.  Or get help to re-invest your assets – see the Final Advantage for details.

6.    Even though the assets rolled over directly to your new account and you do not owe any taxes, you will get a 1099R form from your old 401(k) provider. You will need to show the rollover on your next annual tax return. 

What's critical is to protect the tax-deferred status of your 401(k) assets in the rollover.  If done incorrectly, you may have to pay taxes and penalties.  That’s one reason why it’s a good idea to have an advisor review / oversee the process.

Final Advantage

The final advantage supporting a rollover into an IRA is that you can get advice about investing your retirement assets.  Rolling over these assets into an IRA enables you to seek professional investment advice that is not usually available or fully applicable when your assets were in the old 401(k) account.

This is where Nauset can help.   We can help you evaluate your goals and risk tolerance and develop a retirement plan that consolidates all your retirement assets.  Then we can integrate your rollover assets into this consolidated approach so that your retirement assets work together toward your goals.  We can help you simplify your retirement planning process, and make your new rollover IRA part of your entire retirement picture.

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