Retirement plan decisions made easy
Drill Down: Should You Roll Over Your 401k into an IRA?
I like this choice. Let’s begin with why, and then I’ll explain the mechanics. The best thing about the IRA is that you get to make the choices yourself. That’s a little scary for some people, but with the help of this book, decisions are a snap.
Chapter 8, about Death and Divorce, presents another reason to roll over the 401k into an IRA. If you die, the rules about how your heirs receive the money in your 401k are set by your employer in the 401k plan documents. They may not be as generous as the IRS allows, because the employer often wants to save on administrative expenses. If your 401k is rolled over into an IRA, your heirs will have the full advantage of the minimum distribution schedules set by the IRS. You can set up your IRA at any one of the hundreds of companies that manage funds. Banks can handle the job, but for most people, going directly to a company that manages mutual funds will work out best. If you have a stock broker or financial planner that you like working with, you can set up the IRA at that person’s company. However, don’t feel obligated to use the broker or planner for your IRA.
If you have it in your mind to buy individual stocks, you can set up your IRA at a stock brokerage firm. You could use an old-line company like Merrill Lynch, or a discount broker like Charles Schwab.
If you simply want to follow the guidelines of this book, your answer is easy. Pick a good mutual fund family and open your account there. Mutual fund families include the low-cost families such as Vanguard and Fidelity, and more traditional families such as American Funds and T. Rowe Price.
Here are the steps involved in picking a mutual fund family.
1. Determine if the fund family has the range of funds that you need. Review my advice on asset allocation. In general, you’ll need access to domestic (United States) stock funds, including large and small cap funds; foreign funds, ideally both developed and emerging countries; and a bond fund. All of the large fund families will be able to handle your needs. The only time that you might have a problem is if you are considering using a small, new fund family.
2. Look at fees. I confess. I’m cheap. I like fund families such as Vanguard and TIAA/CREF because they have very low fees. Higher fees don’t always result in better performance.
3. Get good customer service. This is a competitive market. You should be able to get very good customer service. If your experience is lousy when you are setting up your account, it WILL NOT GET BETTER after you open the account. Companies almost always treat prospective customers better than existing customers, so if your experience is not great while they are trying to sell to you, it certainly will not improve after you sign on the bottom line. The bright side is that you can change to another company if you’re unhappy. This is a short-term arrangement, not a marriage for life.
These choices show the advantages of the IRA rollover. You can make sure that you get exactly the types of mutual funds that you want. You can make sure you are selecting a company with great customer service. And you can get the right funds with great service at a very low price. That’s the beauty of the IRA rollover.
Bill Says: Set up an IRA and move your 401k over when you change jobs. Next time you change jobs, use the same old IRA and roll your 401k over again.
If you roll your 401k into an IRA that has no other contributions in it, you preserve the possibility of later rolling the IRA into a new employer’s 401k plan. I don’t see a lot of value to having your money at a 401k rather than an IRA—usually you have much more flexibility within an IRA. However, it’s easy enough to preserve your flexibility by setting up a separate IRA just for your rollover.
It is VERY important to get the details right in a rollover to an IRA. Do it wrong and you owe taxes right away. Here are the steps involved:
1. Select a company to administer your IRA. Tell them you will be rolling over a 401k plan, and ask for detailed instructions on how the check to them should be made out.
2. Tell your 401k administrator that you want to roll over into an IRA. Provide them with information about your new IRA account, including the name and address of the IRA administrator, and your account number. Specify that this is a “direct rollover,” also known as a “trustee-to-trustee” rollover.
3. The 401k administrator will make out a check to your IRA account. If you have a cool 401k administrator, they will send the check directly to your IRA administrator. If you have an old-fashioned administrator, they will send the check to you.
4. If you receive a check, inspect it carefully. It should be addressed in some fashion that resembles this: “XYZ Funds Inc. for benefit of John Doe.” There are a lot of variations on this, but the key is that the money is headed over to an IRA company. You have a problem if the check is made out to you: “John Doe.”
5. If you receive a check that looks good, send it to your IRA company; be sure to include your name, address, and account number.
6. If the check looks wrong, stop. Do not deposit it to your account. Call for help. Ask the 401k administrator if this is how the check is supposed to be made out for a direct rollover. Ask the IRA administrator if the check looks right for a direct rollover. Never, ever, deposit the check in your personal bank account. If you get an OK from the IRA administrator, send the check to them.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
» Lesson 6: Changing Jobs
Lesson 9: Your 401k, Your Other Assets, and Your Life
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