When you have a 401k plan at work, and you leave your job for any reason, you can choose between taking a 401k rollover into another brokerage account, or leaving your funds with your employer’s plan.  For a variety of reasons, it’s nearly always best to roll over your 401k.

With so many people saving more today, and also facing an increased possibility of being laid off and changing jobs, using the 401k rollover option is a way to maintain some control oer your retirement security.  Unfortunately, the roll over is not very well explained or understood by most investors.  It’s something we advocate very strongly – to get your money out of the hands of mutual fund managers who do not have your best interests at heart!  It might mean you need to take the time to learn to invest money beyond your current knowledge, but that is FAR better – and more profitable – than sitting idly and helplessly watching your retirement nest egg vanish without any comment from your plan administrator or your company’s mutual fund managers…

When you have a retirement plan set up by your employer, the investment options are always very limited. They don’t want to pay a lot of money in admin fees, nor take a lot of risk, by offering a wide selection of investment vehicles to their employees. The management headaches are too great.  And, their plan consultants are probably telling them all the same conventional crap about perpetual growth, stock market returns, etc etc. 

However, once you set up a self direct IRA using your 401k rollover, you can start investing in all types of vehicles for retirement that were previously unavailable.  Now, you can start taking control over your money,and not leaving it to the mercy of conservative – or worse, convention – mutual fund managers.

To roll over your 401k account, you first open a new, self-directed IRA account with your new broker of choice.  As you complete the paperwork, you’ll se that they ask if this is a rollover account.  If so, they will give you all the appropriate paperwork to have everything transferred from your employer’s plan.  As long as you aren’t taking any withdrawals from your retirement account, there are no penalties or taxes required. 

You have four main options when you leave your employer, as to what to do with your 401k rollover.  They are, in order of preference:

1) Cash in your account. BEWARE: if you cash out your account prior to your statutory allowance, you will pay taxes and penalties!
2) Stay with the retirement plan from your previous employer. This is where you could stay if you really just don’t care about what happens to your money. 
3) Transfer the balance of your prior retirement account into the retirement plan offered by your new employer. At least here you can keep an eye on it.
4) Open a Self Directed 401k Rollover IRA account with another broker or mutual fund of your choice, and transfer all retirement funds into that account.

We don’t recommend you ever do #1 unless you are in serous, dire financial difficulty.  You will lose roughly 40% of your account in fees and penalties.  As for options #2 and #3, these are both  conservative, hands off type decisions.  If you just don’t want to think about making your money work for you, or even think about it at all, then leave them in the hands of the mutual funds your employers have chosen for you.  But don’t complain when you lose money! 

Only by choosing #4 will you have a new chance to really build up your account balances for retirement.  With this account you will learn more about investing,  and have the option of buying and selling whatever investments you choose that fit your personal financial plan.  It’s not for everyone, but by learning a little about investing, you can gain a lot more secure retirement.

The biggest problem with employer retirement plans offered to employees is that they include a very limited number of investment choices. Of the ones offered, many overlap in the types of stocks and bonds they invest in. A study from Columbia University found that the median number of mutual funds made available to employees was just 13. And this included all funds, even money market funds, fixed income funds, and balanced funds, as well as stocks.

Since you have fewer investment choices within your 401k, your employer-sponsored plan hampers your ability to profit during different market trends and to reposition your retirement balance into accounts with stocks, bonds, mutual funds and ETFs that offer higher risk-reward profiles.

The best thing you can do is to set up a 401k Rollover account with a brokerage that will give you access to all the types of investments available in the market.  (We use TradeKing for all of our accounts, since they have great educational materials and really low fees.)  By opening up a 401k roll over IRA at another company, you can break out of the limits of your employer-sponsored plan and thereby increase exponentially the number of mutual funds, stocks, bonds, ETFs, money markets and more that you have available for investing. Choose a broker that has great resources for investors to learn, such as large investor discussion groups, materials about how to invest, training videos and so on. There’s always something to learn to grow your retirement account to its fullest potential.

It’s easy to see how you might improve our retirement account returns.  If you transfer $50,000 out of your 401k plan, and move it to the Rollover IRA, having a wider range of investment choices can mean that your annual return increases from 8% in the old 401k, to 12% in the Rollover IRA. After 20 years, your roll over IRA will be worth $482,315, more than twice the $233,048 that you would have had if you’d kept your funds in the employer-sponsored plan – and that assumes you haven’t added any deposits to your Rollover IRA.

So how do you set up a 401k rollover account?  There are two ways you can do it.  You can start by opening a Rollover IRA account with your new broker (also known as a self directed IRA, because now you call the shots!)  After that account is set up, you can contact your plan administrator from your former employer and ask to transfer your assets into the new account.

After that your two choices are to have the money sent directly from your previous 401k plan, into the rollover IRA account. This is known as a direct rollover. The second alternative is the indirect rollover, where you you take a distribution of the funds from the retirement plan, then deposit them yourself into your new roll over account.  Other than in the event some exception applies, you are given 60 days to get that distribution into the new account and avoid any taxes or penalties for a withdrawal.  Check with your old and new plan administrators to see which is right for you.

Now that you have set up your 401k rollover account, you can continually leverage that account each time you switch jobs, by moving any accumulated 401k investments into the rollover account.  You just have to instruct your employer’s retirement plan administrator to transfer your assets to the new IRA account.

There is also an option for your to continue to deposit funds to your new IRA, however check to see whether you are subject to limits regarding annual contribution amounts.

The bottom line is, why leave your retirement funds to sit in an account where they are not going to work as hard for you as possible?  Opening up your own self-directed IRA by transferring to a 401k rollover is your best option for growing your future retirement nest egg.   Your new 401k rollover, now opened up as a self-directed IRA, will give you much more control over growing your retirement savings.