📝 A Quick Guide to Doing 401(k) Rollover for the Busy Professional

☕ Good morning!

Wrangling your 401(k) during a job change or retirement can feel like trying to herd cats. Stepping away from the overwhelm of juggling career moves, family responsibilities, and investment decisions, the admin work of a 401(k) rollover typically finds itself as a burning item at the end of the to-do list.

Today, we’ll examine the best practices for rolling over your 401(k) and keeping your retirement savings on track– all in less time than it takes to drink an espresso. 

Let’s dive into it. 

Chances are this edition of the Making Cents of Your Money newsletter isn’t catching you mid-job change (if so, what a cool coincidence!), but it’s still helpful to understand the underpinnings of 401(k)s and your options in the future.

🌊 A 401(k) rollover means you’re just moving your retirement funds from your old 401(k) to a new 401(k) plan or an Individual Retirement Account (IRA). 

This little move helps you keep all your savings in one pot and keeps the taxman at bay.

You’ve got two different types of rollovers– direct and indirect. 

Direct Rollover: Imagine you’re handing off the football directly to the quarterback. The funds go straight from your old 401(k) to the new IRA or 401(k) without you ever touching the money. There is no fuss, no muss, and no tax penalties.

Indirect Rollovers are more like a game of hot potato. You get the funds and have 60 days to toss them into your new account. If you don’t, you’ll pay taxes and possibly penalties. 

Plus, your old employer keeps 20*% back for Uncle Sam, so you’ll need to come up with that dough from somewhere else to keep the IRS happy.

If you miss the 60-day deadline for an indirect rollover, it’s treated as a distribution. You’ll owe taxes and possibly penalties. But don’t fret; the IRS has some exceptions.

*A point of clarification here: the 20% withheld isn’t permanently lost; it’s a prepayment of your federal income taxes. The withheld amount is credited toward your overall tax liability when you file your tax return. You may receive a refund if your actual tax liability is less than the amount withheld.

🔍 Key Point: Unless you’re entertaining a specific tax strategy, always go for the direct rollover. 

🚀 Alright, let’s talk about why you’d want to roll over that 401(k):

🍀Consolidation: Merging multiple retirement accounts into one simplifies management and reduces paperwork.

💪Control: You gain better control over your investments, ensuring your money works effectively for you.

📉 Fee Management: Rolling over allows you to reassess and potentially lower the fees associated with your retirement accounts.

🌟 Regardless of direct or indirect rollovers, use this moment to hunt for a plan (whether your new job’s 401(k) or a traditional IRA elsewhere) with lower fees and better investment options. It’s like trading in an older car for a brand-new model that guzzles less gas and runs smoother.

📝 3 Steps to Successfully Roll Over Your 401(k)

1. Evaluate Your Current Plan: Take a good, hard look at your old 401(k): check out the fees, investment choices, and any penalties you might face.

2. Compare New Options: Look at what your new employer’s 401(k) offers, or consider rolling over into a traditional or Roth IRA. Compare investment choices, fees, and flexibility.

3. Initiate the Rollover: Request a direct rollover to avoid any tax complications. This keeps things as smooth as butter on a hot biscuit.

If you’re thinking about converting to a Roth IRA, you’ll have a few more considerations and will likely need to do an indirect rollover, but more on that later.

🔍 Differences Between a 401(k) and a Traditional IRA

🚰 Imagine you're filling two different rain barrels. 

Your 401(k) is the larger one, holding more each year ($23,000 versus the traditional IRA's $7,000). 

Plus, your boss sometimes adds a bit extra to your 401(k) barrel through a company match—think of it as free water from the company picnic. 

Your IRA barrel, however, is all on you.

🍽️ Now, let's talk about choices. 

Your 401(k) is like dining at a set menu restaurant—limited options picked by someone else. Meanwhile, your IRA is a buffet with a wide range of investment dishes.

🤑 Fees are another thing. 

401(k) fees can sneak up on you like extra charges at a fancy gym. Traditional IRAs often have lower fees, more like a pay-as-you-go gym.

🌊 And when you hit 73, both barrels have taps that start flowing, whether you like it or not. 

These Required Minimum Distributions (RMDs) ensure you start drawing from your savings.

⏰ Early withdrawals? 

Pulling from your 401(k) too soon is like breaking a contract—you face penalties. 

IRAs are a bit more forgiving, offering some exceptions, like for buying your first home.

🚚 Finally, moving funds. 

Switching a 401(k) can be like transferring schools—lots of paperwork and a comparatively more complicated process.

An IRA move is simpler, like changing a subscription service– you’re in charge. 

A 401(k) offers a clear advantage when your employer offers a 401(k) match, which is essentially free money. 

However, once your 401(k) money is already in, it’s worth exploring a traditional IRA for more control and options. You can still opt-in for your new employer’s 401(k) with their match. 

It’s like having your cake and eating it too. 

And then there’s the nifty financial maneuver of converting your 401(k) into a Roth IRA.

🔔 Pro Tip: Chatting with a financial planner is advisable to see which option suits your needs best. I’m hosting a free event later today at 5:30 EST to talk about everything job change, including 401(k) rollovers.

💡 Roth Conversions: A Strategic Move

Switching your traditional 401(k) to a Roth IRA can be a real game-changer if you reckon taxes will be higher when you retire. 

Remember that a Roth IRA is an after-tax account, yet your 401(k) is filled with pre-tax money. To move it to a Roth, you’ll have to pay taxes on the converted amount now, but then your money grows tax-free, and withdrawals in retirement won’t cost you a dime in taxes.

🔔 Pro Tip: If you’re considering converting to a Roth IRA, pick a year when your income is lower. It’s like filling up your gas tank when prices are down – smart and cost-effective.

🔑 Making Cents of 401(k) Rollovers

To the uninitiated, a 401(k) rollover is another administrative task handled by someone in HR or Payroll.

However, it’s a rare window to make a world of difference for your retirement by consolidating accounts, managing fees, and making strategic moves like Roth conversions. 

🔔 Pro Tip: Tune into our free event later today (Wednesday, 5:30 EST) to go through a proven step-by-step process for making key financial decisions to optimize wealth during and after a job transition

It’s kind of like adjusting the sails to get you where you want to go faster; if left unattended, you’ll get suboptimal results, but minor tweaks will make a substantial difference over decades.

Until next week!

Dan from Tailored Cents

P.S. Follow me on LinkedIn for more tax gems to save you money.