How to Rollover Your 401(k) to an IRA

Posted on Posted in Investing, Retirement

I’ve recently found myself in a situation where I have to do something I’ve never done before. That involves changing my 401(k) retirement plan from my old employer to an Individual Retirement Account (IRA). How exactly do you rollover your 401(k) to an IRA? My dog rolls over. Is she involved?

If you’re wondering what all that means, no worries, I was in the same boat. Basically, since I no longer work for my former employer, I am no longer qualified to invest in a 401(k) with them. The money I put into the 401(k) went in tax-deferred, meaning I didn’t have to pay taxes when the money was initially invested, but I will have to eventually.

Uncle Sam always gets you. If not today then down the line in retirement. I go over this extensively in a previous post.

 

dog on laptop
These rollovers don’t involve dogs
Rollover Your 401(k) to an IRA

For the sake of ease, I decided to use my main brokerage, Vanguard, whom I already have a Roth IRA with. There are tons of brokerage options out there all competing for your business. I choose Vanguard because of their low fees, but you could use whatever you prefer.

Just so I didn’t screw up the process, I personally called the good people over at Vanguard to see what’s up. I explained to them that I had this traditional 401(k) that I needed to roll over into an IRA. They told me I had 3 options to roll over:

  • Traditional IRA – tax-free
  • Roth IRA – You are taxed
  • Rollover IRA – tax-free with option to put in to 401(k) in the future

I’m glad I made the call for confirmation. I was for sure going to try and put this money in a Roth IRA. Shows you how much I know. Why are you still reading this?

 

The Adaptable Adult Croatia
Shocking that you listen to a guy who takes photos like this

 

I would’ve failed at putting my money in a Roth IRA from the beginning because Roth IRA’s have maximum contribution limits for the current year. You can only contribute up to $5,500 in a Roth IRA for 2016. The 2016 tax year actually ends in April 2017 (that tax return can’t come soon enough, am I right?). Since I’ve already contributed $5,500 for 2016, I can no longer put money in my account.

Traditional IRA vs. Rollover IRA

I was narrowed down to 2 options. Progress. I would like to leave the option open to contribute another 401(k) down the line. Why? If I work for an employer that offers benefits that include matching 401(k) contributions, then I will for sure take it. I will reiterate this any chance I get. This is the ONLY FREE MONEY that exists in investing.

For example, if your employer states in your benefits package that if you contribute 5% of your gross income to your 401(k) retirement plan, your employer will match that same 5%. Sweet deal. I’m not about being lazy, but if you say you’ll give me double the money for half the work, I’m taking it and so should you.

Unfortunately, with a traditional IRA, you don’t get this option. This isn’t necessarily a bad thing. At the end of the day, both a 401(k) and IRA are tax-free accounts. However, traditional IRAs do have maximum contribution limits of $5,500 for people under 50 and $6,500 for people over 50.

Since the balance in my 401(k) is higher than the maximum contribution limit of $5,500 for an IRA, that left me with one other option. The rollover IRA it is. Perfect solution to my situation and for any of you who don’t know what to do with the 401(k) you worked so hard to save up. You can put as much as you’d like in the Rollover IRA, keep it there tax-free, put that money in the next employer’s 401(k), then do it all over again when you leave that job.

This whole process was really easy. I initiated it online and had to send in some paperwork to make it official. Be sure to call your brokerage if you have any questions or need assistance.

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