After leaving a previous employer, it’s going to be tempting to just kick back and relax for a while. The 9 to 5 weighs on your soul and after a termination your brain probably needs to unwind. It’s healthy to unwind a bit. But after a week or two of relaxation, travel, Netflix binging, or whatever else floats your boat, it’s time to think about what to do with the money in your 401k. A rollover is likely the best option IMHO. (I hope you contributed to a 401k, because if you didn’t you’re likely missing out on free money but that’s another article.)
Now, I’m not a licensed financial advisor. Much to the contrary, I’m just a guy that has taken a deep interest in money and investing since the late 90’s but everything I’ve read would convey that with very few urgent exceptions, you should NOT take a withdrawal for personal use. Why? Your going to have to pay an early withdrawal fee. Also, you’re going to have to pay income tax on this money. If you do this you’re going to see a significant portion of these funds disappear.
So what are your options? The two most common are below.
Do nothing. Leave it in your Employers Retirement Plan
This might not be the worst option. At least you shouldn’t get hit with an early withdrawal fee or have to pay income tax. And if yo have a large balance in your 401k, you are subject to the whims of the market while the money is transition. But that being said, there are reasons you may want to get that money out of your company’s retirement plan with the quickness.
Your employer’s plan literally may be pickpocketing you.
- Your employer’s plan might not have great investment options. A good traditional discount broker like Vanguard, Fidelity, or Schwab is likely to have a rich offering of investments to choose from. And if you don’t want to manage your investment these days there’s great advisor managed “robo-advisors” like Betterment, Wealthfront, or the quite interesting free new automate investment advisor M1 Finance. I recently opened an account and I like what I’m seeing so far.
- Your employer’s plan might have high expense ratios in their funds. In my humble opinion this is predatory and ought to be illegal.
- Your employer’s plan literally may be pickpocketing you. My employers plan administered by Empower, actually charges your around $7 per quarter. Why? They say for “administrative costs”. I’ve read somewhere that this is where companies get some of the money to do the match. There’s far to many brokers that won’t charge you $30 a year just to be a customer. If your plan does this, get the money out. But how?
Roll it over to a better home
If you’ve determined that you want to keep your money away from fees and administrative cost, consolidate multiple accounts, or just have more options, most likely rolling it over is a good choice. So how?
The first step is going to be to establish the new account to roll it over to. You can do your own research but being the investing enthusiast I am, I’ve found the best choices to be amongst the following:
- Vanguard, Schwab, or Fidelity. Why? Ultra low cost index fund and ETF’s. No commissions on buying and selling Vanguard funds and ETF’s.
- Betterment, Wealthfront, or M1. Why? Investments managed at a fair price by intelligent algorithms, to maintain your desired risk level. This is great for when you want to automate your investment management.
Once you’ve established your account, you’re going to want to talk to your old plan and go through their (sometimes painful) process to start the rollover. Often your new broker can assist with this as they are happy to help you move the money into their custodianship and will take this as an opportunity to be of service and show your their customer service. In my experience, Vanguard does well with this.
It’s actually kind of a funny feeling. It’s a bit like calling your ex girlfriend with your prettier new girlfriend on the phone and telling her that you need to come pick up your things. Sorry old retirement plan…I’m moving on.
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