Finding lost 401(k)’s

Do you participate in a workplace 401(k) or similar retirement plan? Did you do so at a former employer?

We recently celebrated a day in honor of the 401(k). Isn’t that surprising? Does it get a holiday? Wow.

Let’s consider 401(k) plans you contributed to at a former job. Did you forget about them? Hopefully not! Have you been following them?
Have you considered rolling over the money to an IRA?

From How To Money:

• Capitalize helps you find old 401k accounts, and roll them over to IRAs — for free.  (You can of course initiate your own rollover, but screwing it up has massive downsides. Capitalize just makes it easier–that’s why we like them)
• …you can choose whichever IRA provider you want (we both personally use Fidelity/Vanguard because: no fees and access to free/low-cost index funds!).

In some cases, you may want to keep the money in a former employer’s 401k. For example, say that you want to use a traditional IRA to perform a backdoor IRA—this will mess up the IRA’s taxability. Ask us how we know.
But here is why you might want to roll over the IRA—high fees or bad investment choices. The fees could come from the plan itself or from the (limited) options to choose from.
For example, if the plan charges a 1.5% fee and you invest $500/month (you likely contributed more), for 30 years, you paid $182,139 in fees, for a balance of $551,935, vs. a $666,926 balance (source: How to Money), which could be years of retirement years lost!

Option 1: Initiate a Rollover to an IRA

This is a legal way to transfer your 401k funds into an IRA without incurring any taxes or penalties.

However, this is a window that lasts for 60 days once initiated.

This is the most common option.

3 ways to do this:

With your financial advisor

Coordinating with the custodian where your IRA is held

Doing it yourself (Capitalize is a great option for this)

Option 2: Initiate a Direct 401k Rollover from 401k to 401k

If you have a 401k at your new job, you can also initiate a direct rollover to your new 401k.

Why do this?

Enjoy contribution limits of the 401k

May have better options (Ex. match, Roth option, fund choice, etc.)

To avoid the “Pro Rata Rule” (related to backdoor IRAs)

So don’t think you must put it in an IRA when you leave.

A good option for those who like their 401k perks.

Option 3: Leave It and Monitor It

There are a couple of reasons why you might do this:

You like where it’s invested

It may be more cost-efficient (if your employer already uses Vanguard, etc.)

To avoid the “Pro Rata Rule” (This is related to backdoor IRAs)

How to Money

Note, you do not have to roll over your money. You can keep it where it is. If you are invested in passive index funds, leave them alone. Just don’t forget about the account!

Tags: financeretirement