84 – How to Setup a Rollover IRA


Episode Overview:

The Rollover IRA is a popular tool that people use when changing their employers. Your 401k at an employer is under their plan. Rollover IRAs allow you to roll money over from that account in to your own, enabling you more control over your funds. Ken breaks down the rollover action, providing you a step by step process of what to expect. Ken also offers up some do’s and don’ts of fund management – such as avoiding taxable events.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy day to you. This is Ken Kaufman, and I am thrilled you’re here for episode number 84, How to Setup a Rollover IRA. Now, the reason why rollover IRAs are so popular is because most of us don’t stay in the same job for our entire career. In fact, some of us move jobs multiple times, and some of us even change careers multiple times throughout our working years. As a result, when you have a 401(k) plan at your employer, and you contribute to it, and the employer contributes to it, and you build up value, if you leave that employer, especially if it’s fully vested, the employer’s portion is fully vested, of course, the portion that you contributed is always yours, and all the earnings associated with all of that, you may not wanna keep that money in your old employer’s 401(k) plan. And so, in this scenario, and sometimes it might make sense to keep it in that plan, but for the most part, if you’re moving jobs or moving employers, it’s usually better to roll your plan over into your new employer’s plan, or what often ends up being the best is to roll your money from your 401(k) account into a rollover IRA account. And so, today we’re going to spend just a few minutes talking about exactly how to do this.

So, you’re in a position where you’re ready to do a rollover or you at least wanna seriously consider it, or you’re thinking you want access to that money. The very first place of encouragement I would have for you and suggestion is try not to cash this money out. I see so often people will be at a job. I know several that have been at a job, you know, for a year, or two, or three, they’ve faithfully contributed, they’ve taken advantage of the employer’s match by contributing the amount that’s required to maximize the match that they can get from their employer, and then when they leave their jobs, they just cash the money out. The challenge with this is, is that that creates a taxable transaction. Money coming out is taxable.

Now, if you put it in this Roth, only the earnings would become taxable, but you can also be subject to penalties of an additional 10% on top of whatever taxes you owe. And so, it becomes really expensive to do this, to basically convert this money from retirement funds or what are called qualified funds and convert those over into funds that you’re just gonna use in your everyday life. My number one encouragement when you’re going through this process is to resist the temptation, if at all possible, to cash this money out and keep it in a retirement plan. So, if you’re moving up from a 401(k) into your own rollover IRA, great. Keep it there don’t take it out. Try to resist that temptation. Remember, this is money you’re setting aside for down the road, in the future, retirement, or whatever you wanna call it, at some point, a ways down the road in the future.

The other thing to remember as you’re going into this is that some of your money in your account you may have selected in your 401(k) to defer into a Roth 401(k) option instead of the traditional 401(k) option. Your employer’s contributions, whatever’s vested, all of that is going to be in a traditional format. And so, when you’re preparing to roll out of your employer’s plan, you may need to set up a rollover IRA, actually two, one for the traditional IRA money, 401(k), which will now be in an IRA, and then the other for the Roth option. And the reason why is to protect the tax advantages of both of those things that you’ve done. In one instance, you’ve gotten already benefit for putting the money in. And so, that saved you on taxes. That would be the traditional side if you went that route and on the Roth, you put dollars in on an after-tax basis. Those are all growing tax-deferred and then when it comes out, it should all come out tax-free as long as you’re over 59 and a half and meet the general requirements. So, with these two things, one, try not to cash it out, and two, remember that you’ve got possibly traditional and Roth money and you need to account for that and be able to explain that in this process.

So, the first thing you need to do is you need to pick a new custodian. This is any investment company. Almost every single investment company, online, or brick and mortar on the planet will take rollover IRA money. In fact, they’re generally excited to do it and to help you with managing your money. So, the Vanguards, the Fidelity’s, the TD Ameritrades, the Charles Schwabs, the M1 Finances, all of them, you would begin by going to them and saying, “Okay, I wanna create a rollover IRA. I’m gonna bring money over.” You get your account all set up, and then you need to make the choice about how you’re going to invest your money. And you get all that clarified. And again, I’ve said this in the past. If you’re not sure where to put it for right now, just find that targeted fund that most matches where you think you might retire down the road and at least put it there to start. And that’ll give you time to either go get some professional advice or to dig in and become a do-it-yourselfer and really, you know, learn and educate yourself. And then you can change your investment options.

Now, one important thing, how you’ve been investing your money in your 401(k) plan. Most likely, where you’re going to roll to will not have exactly the same options. And because of that, when you roll, the 401(k) provider will liquidate the funds and send everything over as cash. So, you wanna be set up so that when that cash comes in, the money can then be invested. And so, you want all those decisions to be done, and made, and prepared for that money to come over. The next thing, once you get your account set up and you make the investment selection so that’s all squared away is you go to your former employer and you request a rollover from them.

Now, 401(k) plans have different requirements and different methodologies for doing the rollover. The easiest way to do this as do what’s called a direct rollover. This means that you go to your 401(k) provider, you tell them who you’ve set up your rollover IRA account with you, you give them that information and account number or account numbers if you’ve got both Roth and traditional coming on the rollover, and you communicate with your 401(k) provider all that information. And then they will send the money via check, or wire, or ACH directly from your 401(k) account over right into your accounts that you’ve set up at your new custodian or investment company. That is nice and easy and clean because you don’t ever have to touch the money and it really avoids a lot of confusion.

Another thing that can happen as often, or I should say sometimes 401(k) providers actually will cut the check to you directly. This is what’s called an indirect rollover. And in this instance, if the money comes to you and it’s made out in your name, you wanna call the investment company where you’re moving your money, where you’re rolling it over to, and check with them. They may have you sign the check over to them, or they may tell you to go ahead and cash the check and then write a check to them or send them a wire with the funds. This is called an indirect rollover.

And when this happens, you have 60 days only. And there are some tax consequences here. So, if you’re getting a check and gonna be putting it into your bank account, make sure to check with the tax advisor and make sure you don’t trip anything there that could cause a taxable event on this money or even cause you to have to pay penalties of some sort. So, I’m just stressing this to make sure that you know that it’s important to get this part right so that you don’t trigger any unwanted, undue, or inadvertent taxes on this money because the hope is we’re keeping it set aside for retirement and we’re not ready to pay any taxes on anything yet or especially any penalties.

One note on the indirect rollover. Just be clear that if you’ve got the green light, everything’s good, and you’re gonna go ahead and deposit those funds into your account, and then go ahead and send the money to the new investment company where you rollover IRA is, make sure that you know that you generally only have 60 days to make that transaction happen, or the money becomes triggered as taxable and there are potential penalties and everything that goes with it. So, that’s it. Pretty basic. How to set up this rollover IRA. Go find your new investment company. Get everything set up. Contact through your HR department, your 401(k) provider. Have them either send the money or if it needs to come directly through you, you can that as well. The money goes in, and now you’re off to the races.

Now, one of the reasons why sometimes it’s better to go to an investment company rather than your new 401(k) provider to your new employer is that often, employer-sponsored plans have limited investment options, meaning they may have on their roster 5, or 10, or 15, or 20 investment options total, whereas when you go to some of these online investment companies or brokerage houses, you can have literally thousands of options at your fingertips. You wanna be careful for commissions and fees. And so, you wanna check out all the fees and things, and sometimes 401(k) plans can have fairly high fees as well. And so, as you look at all that and consider that, that’s why a lot of people choose the rollover IRA and not going directly into their new employer’s plan because of flexibility and often, the fee structure is gonna be more favorable in both the short and the long-term.

Well, I hope this has been helpful. If you are ready or it’s time for you to transfer money from a former employer’s 401(k) account and get it out of there, and I’d recommend you do it pretty quickly just because often, there’s better options and fees can actually be a lot less when you roll it into one of these online brokerage houses like I’ve mentioned. So, again, I just wanna make sure that I’m adding value here. My focus is to help you as you’re going through this type of transition. And these are the basic simple steps that you’ve gotta follow to get that rollover IRA set up, the funds transferred, and allowing your money to not be taxed or penalized in any way and continuing to grow for retirement. Many, many thanks to you for joining today. This is a wrap for episode 84. Happy day.

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Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.


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