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The Rollover Advice You Actually Need To Get It Right

By Pam Krueger
Decisions…decisions. It’s really important to get the process of rolling over your 401(k) right. When you leave your job one of your most important decisions will be what to do with the retirement savings you’ve built up through the years in your 401(k) or 403(b) plan. You have several choices: you may be able to keep the money where it is, you can ‘roll over’ your savings into an individual retirement account (IRA), or you can take the money by cashing it out. Cashing out is usually the worst decision because you could end up with a big tax bill and early withdrawal penalties, too. But even if you decide to keep the account or roll it over, you need to think carefully about your next step. There’s a lot at stake – your decision could make or break your financial future.

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There are four key questions you need to ask yourself before you move any money from your employer’s plan:

1. Do you want to keep your money in the same plan? Just because you leave your company doesn’t mean your retirement money has to follow you. You may not need to roll over your 401(k) to an IRA; many employers allow you to leave it where it is. But be aware that keeping your money invested in your old employer’s retirement plan has limitations. You have fewer investment options available than you would in your own IRA account, far less control over costs, and you have to follow plan rules. Keep in mind when you leave your job, you won’t keep getting matching contributions from your employer anymore, no matter where you keep your plan. Rolling it over to an individual retirement account opens up a whole world of low-cost investment options that could add up to better investment returns for you over the next few years.

2. Which discount broker will you use to set up your IRA? You’ll need to decide where your rollover IRA will be held. A solid discount broker is by far the best option. With lots of choices, it pays to shop around for a reputable discount broker like a Schwab or eTrade who will be the custodian for your rollover IRA account. Consider the level of customer service you want, whether having a brick-and-mortar location is important to you and, of course, compare the account fees the broker charges and other costs you’ll pay whenever you buy or sell a fund or a stock.

3. How do you avoid paying a 20% mandatory withholding tax? Once you’ve selected the brokerage firm for your rollover, follow the rules to avoid ’touching’ the money. Specifically, do not ask your employer to cut you a check. The funds must be transferred directly from your employer’s plan to the brokerage firm custodian via trustee-to-trustee transfer. This is the only way to avoid the 20% mandatory tax withholding required by the IRS. Otherwise, if you elected to take the funds into your possession and then walk the check into the local branch, your employer must withhold 20% of your total 401(k) balance for taxes. Then you’ll need to re-deposit that check within 60-days or pay an IRS penalty. A trustee-to-trustee transfer or direct rollover is your safest bet. 

4. Do you want to do this yourself? Or get help from a professional fiduciary advisor? You don’t need to decide ahead of the actual ‘rollover’ process. You can always seek out advice at any point or whenever you’re ready to make investment decisions with the money. It’s important to consider a financial advisor who is fee-only and fiduciary and who specializes in retirement planning. Fee-only means that the advisor is not a sales rep at a brokerage firm or an insurance agent who wants to sell you a new policy. Fiduciary means your advisor must legally act in your best interest. (Brokerage firm advisors are not legally required to be fiduciaries.)  

You now have your new IRA established — this may represent your entire life savings. You'll want to be clear on how to properly allocate and diversify and develop a sound investment strategy, how to determine when you should start tapping those investments to live in retirement, and how to analyze cash flows and ’stress test’ your plan. The goal is to use this money to help you remain financially secure throughout your retirement years.  If you decide to seek out help, Rolling F has partnered with Wealthramp to give all members access to the nation’s largest independent fiduciary financial advisor network, providing financial, tax and estate planning, and ongoing wealth management to anyone looking for unbiased advice. Visit to connect with the fiduciary retirement specialist that’s right for you.