How I Rolled Over My 401k to Keep Investing For the Future


Hopefully You Have More Than a Jar of Quarters When it Comes Time to Retire

Quitting your job doesn’t mean you don’t need to plan for the future. You become financially free, and remain so, by staying focused on the future. If I’ve learned anything in my 37 years, the future comes fast.

When I quit my job at T-Mobile eight weeks ago, my company-sponsored 401k account became ‘orphaned.’ The money was still in there, but no more contributions could be made (unless I went back to T-Mobile, at which point it could be reactivated) . The money was still invested in index and mutual funds and could remain so, slowly increasing in value with the market and re-invested dividends. At just a hair shy of $5,000, it would take longer than I have to grow that account to enough to live off of at retirement age. So what to do?

If you’re unfamiliar with how it works, a 401k is sponsored by your employer. If you take part, a percentage of your paycheck is taken out BEFORE taxes and put into the 401k plan, automatically purchasing selected funds or bonds with whatever money has been contributed. In some cases, your employer may match a percentage of what you put in. I was contributing 6% of every paycheck, of which T-Mobile matched the first 4%. The important thing to remember is that all of this money has been pre-tax, and Uncle Sam hasn’t had his cut yet. That usually comes when you begin withdrawing it.

So when you leave the employer, your choices for the 401k are as such:

  • Rollover the money into an IRA (Individual Retirement Account)
  • Rollover the money into a Roth IRA
  • Cash out
  • Leave the money in the 401k

As mentioned above, leaving a mere $5,000 in the account to sit wasn’t going to do for me. Cashing out meant that Fidelity (who managed the 401k) would cut me a check after liquidating all of the holdings in the 401k…minus an early withdrawal penalty and I would be required to pay income tax on the whole amount. I actually did this once when I left Apple in 2014, taking the check and getting bent over the barrel for doing so.

A Roth IRA is a neat investment vehicle. You put post-tax money into the account, and never have to pay taxes on what you take out after age 59 1/2. For example: If I put $500 in a Roth IRA, buy some crazy penny stock that becomes worth a million dollars and cash out at 60, I don’t pay any tax on the million dollars. In order to qualify for rolling my 401k over into the Roth, I would have to pay tax on the $5,000 first. I didn’t feel like doing that so I went with option #1.

Fidelity made it easy to rollover the 401k balance into an IRA. I didn’t have one setup, but the Fidelity website created one for me as I walked through the steps to rollover online. Fidelity gives the option to carry over the funds in the 401k account (which I was happy with) into the IRA, if they’re available. Mine must not have been, as Fidelity had to liquidate (sell) my holdings for cash, which it then transferred. The hunt will now begin to find replacement investment funds in the IRA (which I’ll make into another blog post soon).

The advantage to rolling over my 401k to an IRA was I didn’t have to pay any taxes on it. I wasn’t cashing out, and Fidelity basically wrote itself a check to transfer the funds from one account to another. Because none of it went to me, I didn’t have a tax bill (that will show up when I eventually DO cash out). Fidelity assured me there was no fees or charges for opening the IRA or transferring the funds since I was staying with their brokerage (Note here: If you ever transfer between brokerages, there MAY be fees…please consult with your financial advisor or Google). When the transfer was completed I found out this was true, but there were still fees.

This morning I checked on the account to verify the transfer and found that nearly $30 was missing from the balance. I found there were fees NOT on the IRA side but from the 401k account. These were “terminated maintenance” fees and taken from the balance when it left the 401k:

I’m not surprised, but the lesson here dear readers is always be prepared for this stuff. Everything in the financial worlds has fees.

Now that the money is an IRA, I can contribute up to $6,000 per tax year to invest. Here’s the other neat thing – any money invested in an IRA is tax deductible on your total income for that year (Disclaimer: I am not a tax professional, do not hold any collegiate degrees in anything remotely math-related so please do your due diligence. There are caveats to tax deductions and IRA contributions based on household income and other factors. Please consult your financial advisor, account, tax preparer, or local friendly IRS agent). This was the other reason I went with the IRA — I own my own business which means my taxes are considerably more complicated. Having another deduction every year helps ease the tax burden. Plus, I get to invest for the future every year.

For more information, check out websites like investopedia.com and IRS.gov for more information on IRAs.

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