Archives for March 2012

When you leave a job for whatever reason it can be a tough time in your life, a time of transition and a lot of change. All of the new things going on around you can be distracting, and if you're not careful it can lead to you not doing some things that need to be done.

One of the things that a lot of people don't really think about right away is rolling over their own company 401(k) to a new IRA retirement account. While it may not be the first priority on your list, doing a 401(k) rollover should definitely be on your punch list, especially if your old company 401(k) is in a plan that doesn't offer a lot of low cost options.

What Can You Do With Your 401(k) After Moving Jobs?

When it comes to your 401(k) there are several options of what you can do with your funds.

• Just leave it alone:  A lot of people will just leave their old company 401(k) in the account with the plan administrator, and not move it at all.  While this can be an OK idea if you've got some great low cost options for investments in your old plan, for most people it makes better financial sense to just move the account to their own IRA with a brokerage or mutual fund company.
• Take the money and run: Some people will take their account balance and just cash it out.  This isn't an ideal plan, however, because if you're not 59 1/2, you'll have to pay state and federal tax rates, along with a 10% early withdrawal penalty.  After all is said and done you could be left with just over half your money after you pay your taxes and penalties. Who would want that?
• Transfer funds to a new 401(k):  Some people may find a new job and get a new 401(k) right away.  If you do, you may be able to roll the funds over to the new plan. Just make sure it's a good plan with low costs.   For most people, however, their best option is the one below, rolling the old 401(k) into an IRA.
• Roll the 401(k) into an IRA:  Rolling over your 401(k) to an IRA that you've set up at an external brokerage or mutual fund company is probably going to be your most ideal situation.  You'll have a plan with more options, probably less costs and you'll have a whole lot more control.  Check out FiPath's new rollover tool through the link to the right for help in finding a company to work with.

So for most people the best option is to do a 401(k) rollover to a good low cost IRA.

Why Would You Want To Do A 401(k) Rollover?

So what are the main reasons why you would want to roll over your 401(k) upon leaving your old job?

• 401(k) plan investment options are usually limited: When you have a company 401(k) usually there is a plan administrator who chooses what funds to include in your company's plan.  Some plans only offer limited choices with one option for index funds, maybe no international exposure, etc.    Rolling over your funds allows you to choose better investments that are more suited to your situation.
• 401(k) plans have higher costs:  The funds that have been pre-selected in your 401(k) by your plan administrator won't often be the best or lowest costs funds unfortunately. The expense ratios can often be quite outrageous. Besides that there are sometimes annual management fees or other miscellaneous fund fees.  Move your funds to an IRA where you can better manage your costs with low cost fund options.

In some cases you may not want to do a 401(k) rollover.  For example, if you're retiring early, planning a Roth conversion, or situations where you're dealing with a large amount of company stock.  But those situations aren't very common. So let's move on to the next step, doing a 401(k) rollover, step by step.

401(k) Rollover Step By Step

Here is a step by step look at what you need to do when performing an 401k rollover to an IRA.

1. Open your IRA:  The first step is to open an IRA at the company of your choice, be it a brokerage or mutual fund company.  Here's how to choose a IRA custodian.
2. Get the forms your old 401(k) provider: First confirm that you don't have any restrictions on rolling funds over, and then request the forms that you'll need in order to get the ball rolling.   When talking to your contacts, make sure to ask what information exactly that you'll need from your new IRA in order to do the transfer.
3. Verify account setup with new IRA provider:  Talk to someone with your new IRA custodian to ensure that your account is ready to receive transferred funds.  Make sure you have everything you need to fill out the forms from your old 401(k)'s company.
4. Fill out the 401(k) transfer paperwork: Fill out the paperwork that you received from your old plan's administrators, making sure that you have filled everything out completely.  When you're satisfied that the paperwork is complete, submit it and wait for your funds to be transferred.
5. Verify direct rollover of funds:   Make sure that you ask the old 401k company to do a direct rollover of funds, and not an indirect rollover.  The difference is that with a direct rollover a check goes directly to the new IRA custodian, and you don't  have to worry about taxes/etc.  With an indirect rollover the check would be made out to you, with 20% taxes withheld, and then you are required to deposit the entire amount of the old 401(k) balance (by adding in your own money to compensate for withheld taxes) to the new IRA within 60 days.  If you don't you'll be subject too taxes and penalties for early withdrawal.  As long as you do deposit the entire balance you'll receive the amount withheld when you file taxes.

Doing A 401(k) Rollover Shouldn't Be Too Painful

Moving on from an old job can be a stressful time, and the things associated with finding a new job, moving, and so on can take up a lot of time.  In the meantime doing things that don't seem that important, like rolling over a 401(k), can get pushed to the back burner.  But it's still important to investigate your options when it comes to moving your account balance.  In the long run it can be a difference of thousands of dollars.

So after immediate concerns have died down look into your options.  In most situations that means rolling over your 401(k) funds into a new IRA account with a discount brokerage, mutual fund company or a company like Betterment.com.    Just make sure that you don't let your money sit in an old account with high fees and no good investment options for too long.  Good luck!

Rollover your old 401(k) now. FiPath’s new rollover tool will let you find your perfect provider to roll over your 401(k) to an IRA in minutes. Get started!

Jeff Rose over at GoodFinancialCents.com recently had an epiphany when talking to a college class about investing and retirement.  He realized that today's generations really aren't thinking about retirement, and a lot of them don't even know what a Roth IRA is, what a 401k is and just how to get started investing.  He wanted to get people started thinking about retirement, and came up with the idea to start the Roth IRA Movement, a movement of bloggers and personal finance journalists to get people thinking about the basics of saving for retirement, specifically with the Roth IRA – one of his favorite retirement vehicles (and mine).

Today 125+ bloggers are banding together in a one day event that will hopefully spur others to start thinking about retirement and saving for their future  – in the Roth IRA or whatever retirement account best fits their situation.   For my part in the event today I'm writing up a brief synopsis of the basics of the Roth IRA.

What Is The Roth IRA?

In 1997 the Roth IRA account came into existence when the Taxpayer Relief Act of 1997 was passed. The late Senator William Roth of Delaware was the main sponsor of the bill, and the account type bears his name to this day.

The Roth IRA (Individual Retirement Arrangement) is a retirement vehicle in which you can invest in securities, stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible as well).

Part of the reason the Roth IRA has become so popular in the past 15 years is because they offer a nice way to save for retirement that offers tax-free withdrawals at retirement.  In other words, you are investing with money that has already been taxed, and when you pull the money out at retirement the contributions and earnings are tax free. Pretty nice, huh?  The IRA is similar to the Roth IRA, but instead of contributing post-tax, you're contributing pre-tax and will have to pay taxes on the money withdrawn at retirement.

Contribution Limits For The Roth IRA

The Roth IRA account type has contribution limits associated with the account.  So unfortunately that means you won't be able to just dump as much money as you want in there every year.  They've given the account special tax free status on earnings, but along with that come contribution limits.

The limits haven't changed for the past few years.  Since 2008 the contribution limits have remained at $5,000.  For those age 50 and above you can make an extra contribution of $1,000 every year, which means you can contribute a total of $6,000.  Here's a table showing the contribution limits for the Roth IRA since 2002.

Income Limits For Contributions

The income phaseout limits for contributing to a Roth IRA start getting phased out at about $110,000 for single filers, and at $173,000 for married filing joint filers on a Roth IRA.

So basically when you reach the bottom level of the income phaseout limits, your ability to contribute to a Roth IRA starts getting phased out. To figure out how much you can contribute, you would subtract your modified adjusted gross income (MAGI) from the upper end of the phaseout range, divide by the amount of the spread in the range.  You'll get a percentage after you divide. That percentage is the amount of the full $5,000 that you can contribute. So if you're resulting number is 66% – you can contribute 66% of $5000 – or $3300.

Example: If you are married filing joint and you make $180,000, you would take $183,000-$180,000=$3000.   $3000/$10,000=.30.   $5000*30%= $1500.

Want a more detailed explanation of figuring out how much you can contribute? Check out this post on Roth IRA Eligibility.

Eligibility For The Roth IRA – Any Age With Earned Income

Anyone with earned income along with a W-2 or 1099 can contribute to a Roth IRA.  There aren't any age restrictions for contributing to a Roth IRA, so as soon as your child has earned income (that modeling job they got paid for may count) they can invest in a Roth IRA.  The earlier they get started, the better their gains will be!

It's Easy To Open A Roth IRA

Opening a Roth IRA doesn't require an advanced finance degree, and just about anyone can do it within an hour or two. There are only a few questions you  need to consider to start:

• Where to open the account (bank, discount brokerage or full service mutual fund company):  I would personally open an account at a low cost mutual fund company like Vanguard, or if you want to be even more hands off, via an account with a company like Betterment.com.
• How you'll be adding money to your account: You'll need to figure out how you'll be funding the investments – if you'll be depositing $5000 for the year all at once, of if you'll be making regular deposits throughout the year.
• What types of things you'll invest in:  Depending on where you invest you may have different mutual fund and stock options. For example, if you open a Roth IRA with Betterment you'll be limited to a pre-selected set of ETF index funds.  With Vanguard or Fidelity you'll have a wider range of options. You'll want to do your research to figure out what's best of your situation.

For a further more in-depth discussion of opening an account, check out this post: How To Open A Roth IRA And Where To Open An Account

Conclusion

The Roth IRA is a great investment account option that most people should consider.  It allows for tax free withdrawals at retirement, high income thresholds, and no age requirements so even your kids can contribute once they have an earned income.  Why wouldn't you consider opening one?  I know I already have!