Skip to content

Pandemic Got You Feeling Retired? Now…What’s a 401(k) Rollover and Name 3 Reasons Why I Should Do It?

Well, that job’s history . Frustrated by 7:00am Zoom calls and staring at a computer all day may have pushed some to say, “life is short” and call it quits early.  And who blames them.  About 2.7 million Americans aged 55 or older are contemplating retirement years earlier than they’d imagined because of the pandemic, government data is showing. A once in a century pandemic apparently can do that.  And with that retirement or job leave comes the decision of what to do with that 401k or 457 or 403b that you were socking hard-earned money into.  

401k Recap

Just to make sure we’re all on the same page, a 401(k) (often referred to as a 403b for those working for a non-profit or a 457 for those working for a public sector/teaching job) is a type of retirement account offered by many employers to their employees. There are two basic types of 401(k) accounts: traditional 401(k)s and Roth 401(k)s, also called pre-tax and post-tax.  With these plans, employees are responsible for choosing the specific investments from the selection their employer offers. Those offerings typically include an assortment of stock and bond mutual funds as well as target-date funds that hold a mixture of stocks and bonds appropriate in terms of risk for when that person expects to retire.

What happens to your 401(k) when you leave?

So, you are one foot out the door, or one foot out the zoom teleconference.  Since your 401(k) is tied to your employer, when you say “hasta luego” or retire from your job, you won’t be able to contribute to it anymore. It’s just not legal to contribute to a plan where you are no longer employed.  But the money is yours, and it can usually just stay put in that account for as long as you want but most opt to get it out of there as soon as possible. In fact, some employers will tell you that you have to get it transferred out of the 401k within a certain amount of time, because in all honesty, they don’t want to have to continue paying for your plan and they don’t want any liability that may come from it down the line.  That being said, we have clients who forgot about old 401ks from before cell phones were around that have just been sitting there (in cash sometimes, ugh!) and they were able to simply transfer it out.

What’s a 401(k) rollover?

This leads to the question at hand. What exactly is a rollover? It’s really just a funny word for transferring one account to another.  Rolling over a 401(k) means transferring the money to another tax-advantaged retirement account. This could include, but the two most common examples are your new employer’s 401(k) if their plan allows the transfer in of old plans OR an individual retirement account (IRA). And this transfer is a non-taxable event.  You simply would roll over whatever the balance is of your 401k into the new IRA. 

You could also cash it out, but this is really a last resort.  If you do this, you could be hit with both a 10% penalty and also hefty income taxes on the amount withdrawn. That means $500,000 in a 401k cashed out could quickly turn into about $300,000 in the blink of a distribution check.  Try not to do that.

What steps should you take next?

Sure, it’s easy to just let it sit there and forget about it. But be careful here.  There are quite a few reasons you may want to get it out of that 401k.  Here are a few reasons why a rollover may be wise.

Reason 1:  I Want to Organize My Financial Closet

What we see with clients is that they want to feel organized. No really.  With accounts in different brokerage firms and employers, it can become quite cumbersome to keep track of what money is where.  Plus, there may be tax documents and beneficiary updates that have to be done for many accounts.  If it’s sitting all in one IRA, well it’s just easier on the anxiety. 

Reason 2:  Please Can I Invest in Anything Other Than Some Dull Target Date Fund

A second reason is choice.  Many employers literally just offer 10 to 20 different funds to pick from. And believe us, they really can be dull.  If you have an IRA account at a custodian like Charles Schwab, you would open up the flood gates to be able to pick from thousands of funds like thematic funds, low-cost ETFs that invest in medical device technology and most importantly ESG or sustainably screened funds.  Your employer may not even have 1 sustainable fund choice and inside of an IRA, you or your advisor could have hundreds to pick form. 

Reason 3:  I’d Rather Be Fishing in the Keys

A third reason is being able to work with an independent advisor…like Sustainvest.  Having an advisor to help make sure your investment portfolio is staying in line with your lifestyle and risk profile is really the most important thing to keep track of.  There is much more hand holding with a personal advisor versus having to call your former employer to try and get advice from them. Most likely, it won’t happen.  In many cases, it is actually less expensive to have your own advisor versus keeping the plan inside of a 401k plan due to the usually high costs involved with administration, etc. of employer sponsored plans. 

In the end, when that final paycheck comes in and you have one foot on the beaches of Barbados, the last thing that should be on your mind is if your old 401k and retirement savings is properly invested and able to match your investing profile.