How to Navigate a 401k to IRA Rollover
Recently my wife and I have been contemplating rolling over a 401k from her ex-employer into an IRA. Ironically enough (at almost the same time) I learn about a neat 401k to IRA rollover center provided by FiPath, the first independent online resource that provides financial planning information and peer-to-peer collaboration for consumers.
Basically, you’re left with three options when you leave an employer where you contributed to a 401k:
- Cashing it out
- Keeping the money in your current plan
- or, rolling it over into another retirement account
The first time I needed to navigate a 401k to IRA rollover was when I was let-go from my first employer. At 25, I was pretty naïve about money matters and retirement issues. When it came to deciding what I was going to do with the money – the idea of having the cash on-hand was just too much to bear. I caved and cashed out 50% of it, despite the warnings of the financial advisor handling the account.
I probably don’t need to mention the penalties associated with prematurely cashing out a retirement product. What I essentially did was very short-sighted. Sure, the money was nice to have on-hand, but I failed to realize the potential passive earnings I was giving up by cashing in.
In our situation today, we are a bit more experienced now to not make the same mistake. So, logically, we have two options for my wife’s account: keeping it in the current plan or a 401k conversion to Roth IRA.
According to FiPath, 11 million 401k to IRA rollovers happened in 2010. They also estimate there are at least twice that many people who need to do an IRA rollover but haven’t done so (ie, their money is still in the ex-employer’s plan)
I’m learning there are advantages to getting that money out of your ex-employers 401k plan. Among them is control. With the 401k in its present state, you are very limited to how you want to invest the money. Basically, the plan has certain options that you choose from and that’s that.
However, when you can roll over the 401k to IRA, you have more investment options.
Another important aspect of doing a rollover is that you’ll likely see higher returns. According to FiPath: “Because of the lower fees and broader choices that an IRA enables, money invested through an IRA will typically grow at a higher rate of return-this could mean tens of thousands of dollars more in an IRA savings account upon retirement.”
When I first learned about FiPath’s Rollover Center, I had to check it out right away.
The center basically provides you with two options. If you really want to take control of the rollover and have a pretty good idea about investment options, you can elect to go right to a recommended financial firm (option on the lower right). If you aren’t real sure yet and would like some guidance with the whole process, FiPath will direct you to a financial advisor in your area who will help direct you to the best rollover solution that meets your needs (this is button on the lower left).
I looked over both options and we’ll probably end up going through an advisor. I just don’t have enough information about the products to make the best possible decision.
When you elect the Financial Advisor route, you are taken to a page that will help you find an advisor in your area through a zip code search. FiPath also asks you three questions to find the right advisor for your needs: your preferred working relationship (at your home, advisor office, ie), preferred fee structure, and if the advisor is a retirement specialist.
Best thing about using FiPath Rollover Center is the fact that they are completely independent, and have “no hidden agendas or tactics”.
Try ‘em out – and let us know what you think.