Updated on February 3, 2023
If you’re doing a rollover on your own be sure to avoid these 3 slip-ups.
Let’s say you’ve been at a job for a short period of time and you haven’t contributed as much to your 401(k) as you would have liked. You may feel like your account isn’t big and that it’s not worth bothering with the administrative hassle of moving your money.
That’s a common thought. But even a small amount of money today can grow into a sizable sum with the power of long-term investing and compounding, particularly because money in an IRA can grow tax-free. For example, $3,000 in assets today could turn into over $40,000 at retirement if invested appropriately. So it’s worth quickly doing a rollover to make sure your assets are working for you – even if you think your account isn’t that big, particularly because it only takes a few minutes to get started with a 401(k) rollover.
If you don’t take any action and your account is under a certain size, often $5,000, then your old employer can do what’s known as a forced rollover. That means they get to move your money to an institution of their choosing, without really telling you, and often it’s a high-fee, crappy-interface company. Once that happens it’s hard for you to track down the money, and fees can erode your savings thus leaving you with nothing. Unfortunately then you’ve created a self-fulfilling prophecy: by acting as if your 401(k) is small change, your inaction will lead it to in fact become small change.
Avoid this mistake. Consider a rollover even if you feel like your assets are small today because with a little bit of guided work the difference in your retirement can be huge.
Once you’ve decided to open a new IRA then you have to ‘fund’ it with your 401(k) assets. Most of the time that’ll require you to get in touch with your old 401(k) provider (sadly). They can either digitally transfer the assets to your new IRA (yes please!) or they can send you the money via check in what’s known as a “distribution” (not as fun). Then it’s your job to forward that check on to your new IRA provider.
Getting money via check in the mail is pretty old-school. We get it – it feels outdated in an age when almost everything is done online. But let’s put aside our Millennial mistrust of snail mail for a moment and focus on the task at hand. Once you’ve got that check, don’t dilly-dally. Just forward it on to your IRA provider. If you don’t know where, quickly check online. If you don’t forward the check on within 60 days then the IRS can deem you to have withdrawn the 401(k) money permanently which could lead to you paying taxes and penalties. Taxes and penalties aren’t our friends. Let’s not invite them to this fun retirement savings party.
Once the money is successfully in your IRA you’re 90% of the way there. The last thing you need to do is make sure that it’s being invested in something that’s going to grow in value. If you have a managed account where an automated portfolio is being created for you then usually all you do is answer some up-front questions and your provider will allocate you into a portfolio. Done. But if you’ve opened an account at a brokerage firm where you’re supposed to make your own investments then you need to make an investment decision or two yourself. Otherwise your money will just sit in cash and won’t grow very much.
If you’re in doubt and need to make a quick decision then a target-date retirement fund can be a good starting point. It’s basically a low-fee fund offered by companies like Vanguard and Fidelity that has a ‘year’ next to its name representing the year when you’ll approximately retire (e.g. Target Date 2065 fund). The fund automatically buys a mix of stocks and bonds and adjusts it over time. These funds aren’t perfect, but they can be a good quick way to get started while you think a bit more about what you really want to invest in.
