When you are finally hired for a new position (using our steps, of course!), you may have to consider rolling over your 401(k). Rolling over a 401(k) means transferring the retirement savings you had through your former employer to a new account, which could be a 401(k), an IRA or a Roth IRA.
Perhaps the most simple option is to leave that 401(k) be. It’s easy, and those earnings will remain tax deferred until you make a withdrawal. This is a sensible option if your former employer’s fees on a 401(k) are lower than the fees you’d pay to open a Roth, an IRA or a new 401(k). This guide from Business Insider is a fantastic resource if you want to determine your retirement account’s fees.
Another option is to roll that 401(k) over to your new employer’s retirement plan. The experience of investing in this 401(k) will likely be similar to that of investing at your former employer. This option makes sense if your new employer’s 401(k) has lower fees than a Roth, an IRA or your former employer’s 401(k).
You can also roll your 401(k) over into a Roth or an IRA. These accounts will be held separately from your current employer. A Roth will be taxed at the time of the rollover, while the IRA will be taxed in the same way a 401(k) would be - when you cash it out.
Rolling that 401(k) into a Roth - as long as the fees are lower - likely makes the most sense. Paying taxes on the amount you invest, rather than the amount it grows to in the stock market, will be cheaper.
So how exactly do you roll a 401(k) over?
Consider this list from Nerdwallet of the best IRA accounts. Pick an account based on your needs. Then, open a rollover account. Go back to your former employer’s 401(k) account and ask them for a direct rollover. By doing this, you’ll be able to move money from your old 401(k) into your new IRA.
Once the money is in your new account, you have to select some investments. Target date funds, which are investment funds based on the year you will retire, are considered “off the shelf” and an easy way to manage risk and returns. You opt into a target date fund and let your money work for you.
- Alicia McElhaney / She Spends Issue #37