Retirement Answers

Jacob: 00:01

And then once the money's in your account, you can go ahead and begin investing it. And this might be one of the most important steps because I've seen so many times that people just roll over their money into their IRA and it just sits there for six months or a year. And they were like, oh, I thought that money was invested. And then it wasn't. So it wasn't growing or doing what it should have been doing.

Jacob: 00:21

Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there. My name is Jacob Duke, each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show.

Jacob: 00:44

Hey, friends. Welcome back to Retirement Answers. I'm excited and glad that you are here. Today, we're gonna be talking about rollovers and everything that you need to know about them. So I've labeled this as the ultimate guide to four zero one k rollover.

Jacob: 00:57

So, the reason I wanted to talk about this is because it's a super practical topic since almost everyone has a four zero one k or a four zero three b or a TSP or just some sort of employer retirement plan. So today we're gonna be talking through all the advantages of doing a rollover, all the times you may or may not want to do a rollover, the two different types of rollovers and some of the pros and the cons there and some suggestions that I have for you. And then be sure to stay to the end because that's where I'm gonna walk you through exactly step by step, the process to actually doing your rollover from your four zero one k. That way next time, you know, you have a rollover to do, well, you can come back to this episode and know exactly how to do it. So before we get started, welcome to all the new listeners that are out there.

Jacob: 01:37

And if you're a frequent listener, I hope you're finding this really helpful and encouraging. My whole goal in doing this is to empower you and, share tips and strategies that you can use to ultimately live your best retirement. That's why Retirement Answers exists, and as always, if you have thoughts or suggestions on how I can make this podcast more helpful or beneficial for you, feel free to send me an email at jacobretirementanswers dot net, and that's how you can reach me. Okay, let's go ahead and get started with today's show. So today we're talking about Rollovers, but before I jump into all the things we're gonna discuss, I hear the term misused most of the time, but just wanna make sure we're all on the same page from the get go.

Jacob: 02:14

All right, so a rollover is from an employer plan to an IRA. Okay, so it's a four zero one ks or 403B, you are technically rolling your money over from that employer plan to your individual retirement account, being an IRA or a Roth IRA respectively. So that's how a rollover works. A rollover is not a transfer from an IRA to another IRA. So if you have an IRA at Charles Schwab, and then you wanna transfer it to another IRA at Fidelity, that is not a rollover.

Jacob: 02:43

I often hear that term used in terms of moving that money from one IRA to another, you're rolling it over to another IRA. That's technically not correct. A rollover is whenever it changes account types. So four zero one ks is a different account type from an IRA, but an IRA, depending on which institution it's at is not different from the IRA at the other institution. So there's still IRAs.

Jacob: 03:04

So a rollover is from an employer plan to your personal account and a transfer is between any of your personal accounts. Just want to be clear on that on the front end before we jump into some of these different advantages of rolling over a four zero one ks. All right, so let's go ahead and get started with talking through the different advantages of rolling over your four zero one ks. Number one, whenever you have your money in IRA instead of a four zero one ks, you have way more investment options to choose from. In fact, you can invest in pretty much anything within your IRA, whether it be an individual stock, whether it be an ETF or your favorite mutual fund or a REIT or anything that you want to buy, you can go buy.

Jacob: 03:41

On the contrast, whenever your money is in a four zero one ks, you have a select few options to actually invest in depending on your specific plan and every plan is gonna be different. So you might have 10 different mutual funds or 15 different mutual funds or 20 different funds that you can actually pick from, but you're limited to that certain amount of funds and the ones that they actually allow. You can't go buy the different thing that you wanna go buy, you have to stick to what is available within your plan. So that's number one, whenever you roll your money over into an IRA, that opens up a wide array of different investment options for you that might meet your needs more specifically. Okay, number two is that whenever your money is with an IRA custodian, typically they're gonna be far better at communicating with you rather than your four zero one ks plan provider.

Jacob: 04:25

Don't know how many times I've been frustrated with previous plan providers from different four zero one ks's, whether they be my own, or if I'm working with a client on rolling over their funds, a lot of times that communication channel is just not as efficient as we think it otherwise should be. So whenever your money is with an IRA custodian, like Fidelity, Schwab, or Vanguard, they have way better communication techniques and will actually get you the information you need a lot quicker. So that's the second advantage because if you think about it, whenever you leave a company and you leave your four zero one ks where it is and you don't roll it over, well, you're falling into the abyss of like other thousands of people who also have left their 401ks at that company and haven't done anything with them yet. And ultimately that just means that you're just a number and they don't really care to give you a good service. So the second advantage is you would have a lot better communication with your custodian whenever you move that money into an IRA.

Jacob: 05:17

Number three that whenever your money is in an IRA, the rules for that account type are a lot simpler or they're just less rules in general compared to your four zero one ks. So getting that money from the four zero one ks makes your life easier because you know, hey, my money is in an IRA. Here's the simple, rules I need to understand. Here's my contribution limits. Here's when I can take this money.

Jacob: 05:37

Here's whenever I can, here's what I can invest in. All these different things are a lot simpler than your four zero one ks. And whenever you get that money over there, 'll be a lot happier because you don't have to jump through all the different hoops that might be there within the four zero one ks plan. Number four is that whenever you have an IRA, you can do Roth conversions a lot easier. Yes, sometimes you can do a Roth conversion within your four zero one ks plan, but that means that your four zero one ks plan has to have a Roth option and maybe some other rules attached to it.

Jacob: 06:03

So whenever you have your money outside of an employer plan, you get to choose what you wanna do with that money and when you wanna do it rather than having to rely on a plan document like you do within a four zero one ks plan. So if you wanna do a Roth conversion, well, you just open up a Roth IRA and you convert the amount of money you want from your traditional IRA to your Roth IRA, as opposed to having to go through plan providers and understand the rules and say, hey, can I do this? You know you can with an IRA and it's just a lot easier to do. And in fact, it's a lot cleaner and simpler to do because you have all the documentation you need and the custodian is that much easier to work with. And finally, whenever your money is in a four zero one ks, you're paying probably somewhere between 13% of your account balance in fees and administrative costs.

Jacob: 06:47

But whenever you have your money in an IRA outside of a four zero one ks plan, well, the cost of that IRA to have it open is zero. Typically there are no account maintenance fees. The only fee you would have is whatever you're paying your financial advisor because they are helping you invest and guide you along in all the different situations along the way. So your costs technically would be lower with an advisor and an IRA than it would be with no advisor and your four zero one ks plan. And also within your IRA, you can choose which investment options back to point number one, but then also because you're choosing the investment options, well, you get to choose what the expense ratios are on those different investments you are gonna be using as opposed to within the four zero one k plan.

Jacob: 07:25

Sometimes they only have high cost mutual funds, which ultimately adds to your overall annual cost within that four zero one k account. So whenever you have the money outside of that in your IRA, you can then choose which investments lowering your costs, and then also there are no costs to have the account open. Like I said, the only fees or costs are the ones that you would be paying to your advisor. So all in all, in terms of the advantages of rolling over your money from a four zero one ks to an IRA, you just simplify things a lot, you develop a better communication with your custodian and you get a lot more freedom in terms of how you want to invest and the rules are a lot simpler. So for me, it's a no brainer every time, as soon as I get done with an employment and I go to a new job or maybe I'm retiring, I want to roll that money out of that four zero one ks plan almost immediately get it into an IRA, that way I have control of my money in my own personal account rather than having to deal with an employer sponsored plan if and when I need money in the future.

Jacob: 08:22

So we know that rolling over to an IRA is typically going to be the best course of action, but there are a few times whenever you may not want to do a rollover. And the first is whenever you are planning on retiring early. So there's this thing called the rule of 55 that states that if you retire or separate from service in the same year that you turned 55 or later, then you would have the ability to access the money in your 401Ks account, even if it's tax deferred, you can actually access money and in your 401Ks and not pay a 10% early distribution penalty on those funds. Now, remember whenever we have a tax deferred account, like a traditional four zero one ks or a traditional IRA, have we to wait until 59.5 to be able to pull money out without tax and penalty. If we do before then, we're gonna have that early distribution penalty, which is 10%.

Jacob: 09:10

But whenever we use the rule of 55 within the four zero one ks provisions, that means that we can take money if we're 55 or older, whenever we retire or separate from the job, that means we can take money from that four zero one ks account and not pay the 10% penalty. You're still gonna pay the income taxes, but you're not gonna pay that 10% early distribution penalty. Now, couple important things to know there is that you can't do the rule of 55 with an old four zero one ks plan from years ago. It actually has to be from your current employer or the one that you just left. So if you're thinking about retiring at 54 and you are going to be needing money to pull from your accounts to live on until you get to 60 or 62 or whenever your social security or other incomes are gonna turn on, well, you might wanna delay that until 55 terms of your retirement, and then you can use the rule of 55 to access money in your four zero one ks plan without the additional 10% penalty.

Jacob: 10:03

So that's why you would not want to do a rollover if you're planning on retiring and you're needing to pull money out of your retirement accounts and you don't have any other sources of income, like from a Roth IRA, cash, investment accounts, or any sort of pension or anything like that. So whenever you are thinking about retiring early, rule of 55, remember that maybe you don't wanna roll over your four zero one ks just yet. So that's the first reason that you may not want to roll over your four zero one ks yet. And the second reason is that maybe you need creditor protection. Maybe you are a real estate investor or maybe you have a business and bankruptcy or civil suits are something that is a risk for you.

Jacob: 10:40

Well, rolling over your money to an IRA now opens you up to the courts or anyone that's pursuing your money. They could now use your IRA to actually say, hey, you have to send me money out of your IRA and distribute that to me as opposed to if your money isn't an employer sponsored plan under the ERISA act, well, you are protected from civil suits or bankruptcy clauses that could be there. So that's another thing is if you need creditor protection and you're not wanting to risk your money because of different business dealings or things that you might have going on in your life, well, then you want to leave that in the four zero one ks plan because it is protected in that particular account type. So those are the couple of different reasons that you may not want to roll over your four zero one ks plan. I find that those are a lot more rare, especially number two, but the creditor protection issues.

Jacob: 11:28

Sometimes people that are retiring early might wanna pay attention to that rule of 55, but if we've done the things that we needed to do so far in terms of building and saving your retirement accounts, well, we may not actually want to use the rule of 55, maybe want to use some different account types to live on in the early years of retirement and also do some Roth conversions along the way. So sometimes that rule of 55 is the only option, but if we've done things correctly, hopefully we've eliminated the need to have to do that. Okay, so those are the advantages of doing a rollover from a four zero one ks and then also sometimes you don't want to do them. Now, when it comes to actually doing the rollover, remember to be sure to stay to the end because I'm gonna walk you through exactly how to do it step by step. But we have to understand there are two different types of rollovers that we can do in the first place.

Jacob: 12:12

So whenever you roll over funds from an old four zero one ks, well, you can do it in one of two ways. You can do it either as a direct rollover or as an indirect rollover. So what's the difference? Well, whenever you do a direct rollover, the check that you're gonna receive is made out to the financial institution that's receiving the check, and then also it'll have your name on it. So in my case, if I'm doing a four zero one ks rollover and I'm gonna deposit in my IRA, well, would say Charles Schwab FBO, which stands for for the benefit of Jacob Duke.

Jacob: 12:41

So Charles Schwab, FBO, Jacob Duke, that's how the check would be made out. So what's actually happening is that money is not made out to me directly, it's made out to Charles Schwab for the benefit of my account. Therefore, it's a direct rollover. So it's not actually my money because it's not made out to me directly. But whenever we think about the overall rules of four zero one k rollovers, remember there is a sixty day window to get that check deposited into your IRA.

Jacob: 13:07

So we wanna make sure that we don't miss that. So even if that check is mailed to me, which typically is gonna be the case, which we'll talk about a little bit later, even if it's mailed to me and it's made out to Charles Schwab, FBO, Jacob Duke, I still have sixty days to get that check and mail it to Charles Schwab so that they can deposit it into my account without any big penalties in terms of not completing the rollover on time because there could be huge tax implications there. So I say that and I wanna just say, hey, a direct rollover is typically gonna be the best way to go. Now, if you decide to do an indirect rollover? How's that different and why would I not wanna do that?

Jacob: 13:39

Well, whenever you do an indirect rollover, the check is made payable directly to you. So that check would not include anything about the financial institution. It would only have my name on it, but there are a few different wrinkles that you have to deal with. When doing an indirect rollover, the old four zero one ks is required to withhold 20% of the rollover amount for tax purposes. So, whenever you do this direct rollover, you still have sixty days to deposit that check-in your IRA, but there's a big catch.

Jacob: 14:08

You're required to deposit 100% of the original rollover amount in order to not be taxed or penalized. But remember what I said, they have to withhold 20% for taxation purposes. So technically you only received a check worth 80% of your rollover amount. But remember, you have to actually deposit a 100% of the amount into your IRA. So this means that you have to come up with the 20% that they withheld on your own and then complete the rollover by adding that 20% to the 80% check that you received.

Jacob: 14:40

So on a for example, on a $100,000 indirect rollover, you're gonna get a check for $80,000 and the other 20,000 is actually being sent to the IRS as a tax withholding. So you receive the check for 80, but in order to not be taxed and penalized on the $20,000 that was withheld, you have to now come up with $20,000 whether it be from your checking or savings account or somewhere to actually add to your $80,000 check you received to make your rollover whole. If you don't do that, you will pay tax and penalty as an early distribution on the 20,000 that was withheld. So that's really confusing and there's a lot of hoops to jump through with the indirect rollover, which is why I say, hey, don't do that because you're probably gonna end up doing it wrong. So when you're doing a four zero one k rollover, those are the two different options, you can do a direct or an indirect rollover and I always encourage you to do a direct rollover.

Jacob: 15:31

Okay, so let's go ahead and walk through the step by step process to actually doing a four zero one k rollover. But first, if you're enjoying the show so far, I encourage you to give it a rating and review and share with a friend who might find it helpful. That helps me out a lot in terms of finding new listeners and helping more people. So thank you so much for doing that and let's keep going with the process to doing a four zero one ks rollover. Okay, so the first thing we've got to do is we have to have an IRA open at our receiving custodian, whether that be Fidelity, Schwab, Vanguard, whoever it might be, pick your favorite, go open your IRA there, and that is the first step.

Jacob: 16:05

We've got to have the account open so that the check can be received into it. Now, once your account is open, your four zero one ks custodian will typically allow you to do your rollover in a couple of different ways. You can do it either over the phone or they might require you to submit their specific rollover paperwork. Now, I personally like to do it over the phone because if we're being honest, those forms that they send you are super confusing and really hard to understand. And I'm like, hey, I'm probably gonna do this wrong.

Jacob: 16:32

So I like to do it over the phone that way I can just say, hey, I wanna roll over all of my money, a direct rollover to XYZ institution. Because I like to say over the phone, hey, I want to just roll over all of my money, a direct rollover to XYZ institution. And that just is way easier to me than having to fill out and understand all of the forms. Now, once you complete the request, you will likely have a check either sent to you or it will be sent to your IRA custodian. So let's say I opened my IRA at Fidelity.

Jacob: 16:59

Well, that would be the custodian of my IRA. So I want to give you a pro tip here. As I mentioned a little bit earlier, if they provide the option to have your check sent directly to the custodian, then I would choose that option. This eliminates the middleman of you having to receive the check and then also get it sent off again. The less time in the mail, the better in my opinion, the less chance it has of getting lost, which means not necessarily you lose your money, but it means that you have to restart the process, void that check, and then restart over.

Jacob: 17:27

So it kind of eliminates all the different confusion or mess ups that could happen along the way. Now I've seen this sometimes and it's pretty rare. Most of the time they do actually have to send a check because that's how the plan document is written. But sometimes the plan itself, the four zero one ks plan itself will allow you to ask for that money to be ACH or electronically transferred over into your IRA custodian. Like I said, that's the best option, but it's super rare to find that within a four zero one k plan.

Jacob: 17:52

Another tip I have got for you here in terms of checks in the mail and things like that, a lot of times the four zero one k plan provider, whenever they're asking you, if you're on the phone with them, a lot of times the four zero one ks plan provider, if you're on the phone with them requesting this rollover, they will ask you, Hey, do you want this to be, overnighted or two day or, or do you want it to be just regular mail? I typically would say pay the additional cost 25 or $30, whatever it might be to have them, two day mail that to you. That way you get a tracking number on your check as it's in transit. And then if you receive that check, once you actually go send it off to your custodian, I also once again recommend, hey, go ahead and pay an additional cost just to get that money, sent there in a couple of days. That way it's not in transit for as long and you can get a tracking number for that check.

Jacob: 18:40

I like to always have my thumb on where my check is at all times and that way I know, hey, my money is on time, it's going to the right place, and if it ever does go to the wrong place or it ever doesn't actually get there, well, I've got a paper trail of tracking number to know, hey, here's when I sent this in, here's when it went out, all these good things, because this is at the end of the day, this is your hard earned money and it's your life savings. So I want to make sure I pay just a little bit extra money to make sure I've got my basis covered there because that allows me to sleep at night a little bit better. Now let's say that the normal course of action is you receive that check to you in the mail. Well, once you receive that, then you are responsible for mailing that to your IRA custodian, like I mentioned already. But remember, you've got sixty days to get that money deposited into your IRA from the time that you requested the rollover.

Jacob: 19:23

So whenever you get that check, be sure if it's a direct rollover, which is what we're trying to do, do not sign or endorse that check. Because remember, it is not your money. It is Charles Schwab or it's Fidelity or it's Vanguard or whoever it's going to, and it's for the benefit of you. So don't endorse or sign the check, just grab it, and then, I would maybe make a little memo in terms of on a sticky note or an index card and put that in the mail with that check and say, hey, please deposit my check, my rollover check into my account. And then put your account number that way whenever they receive it at the custodian, they know where to deposit that check.

Jacob: 19:59

All right. So if you do the expedited shipping on that check as it's in transit and you get the tracking number, it should be a couple of business days before that money is deposited into your IRA. And then once the money is in your account, you can go ahead and begin investing it. And this might be one of the most important steps because I've seen so many times that people just roll over their money into their IRA and it just sits there for six months or a year. And they were like, oh, I thought that money was invested.

Jacob: 20:22

And then it wasn't. So it wasn't growing or doing what it should have been doing. So that might be one of the most important steps in all of this is actually once the money is in your IRA, don't forget to invest it. So there you go, you did it. You've done a four zero one k rollover and I've gone through all the steps to do that.

Jacob: 20:38

So next time you are doing one of these, go back and listen to this episode, that way you can remember and kind of refresh on what to do and when to do it. But I wanted to give you a couple of things to remember before I let you go. Remember this will, the whole process will take a couple of weeks from start to finish in terms of requesting the rollover, receiving the check-in the mail, then you mailing it off again, then depositing it, and then you investing that money again. It will probably take a couple of weeks, just depending on how fast the shipping that you select on your checks in the mail is gonna be. Also be sure to have the correct type of money rolled over into the correct IRA account.

Jacob: 21:11

So for example, a lot of people have a traditional four zero one ks and Roth four zero one ks within their different four zero one ks plans. And so whenever you are on the phone with your four zero one ks plan provider and you're requesting the rollover, be sure to say, hey, do I have any Roth money in my account? And if I do, I I want to have that sent to my Roth IRA, which we would have to have that open. But you wanna make sure that you're sending the right money to the right accounts. And whenever you receive the checks in the mail from your rollover, you wanna make sure that you're sending that to the correct custodian, the correct account number.

Jacob: 21:40

That way you don't get commingled or misaligned funds based on the account types. And then finally, once again, always do a direct rollover. Don't forget about the sixty day window, and then don't forget to invest your money when it's in your IRA. So thank you so much for tuning into this week's episode of Retirement Answers. I hope this episode on Rollovers has been super helpful and beneficial for you.

Jacob: 22:00

If it has, once again, go ahead and give it a rating and review, share it with a friend. And other than that, I look forward to talking with you again really soon. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show.

Jacob: 22:24

Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes. Thanks for tuning into this week's episode. I look forward to talking with you again next week.