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This month I had on my list of monthly goals to rollover my 401k from an employer I left in 2011 to Vanguard. Last Friday I pulled the trigger after running into a number of hurdles that were preventing me from getting my 401k. These hurdles were:
- Spousal Consent Form – notarized letter with my wife and I’s signature authorizing the withdrawal of my 401k funds.
- Bad Password – my company had a computerized password phone system that required me to know the digits that my password translated to on the phone.
- Fiduciary Not Open When I Call In – it always seemed like every time I got motivated to call in, then the 401k company wasn’t open. Doh!
A lot of time it just takes some good old will power to make things happen that really matter to you and aligning your overall financial picture.
In our instance, here are six key benefits to rolling over your 401k:
1. Continues to delay taxes and penalties
From talking to a lot of my former co-workers on what they did with their previous employers 401k, a lot of them withdrew their funds and incurred both taxes and penalties. One former co-worker told me he incurred a 37% penalty from withdrawing his funds, but he justified it in paying off his credit cards and car debt. It is really important to remember to use retirement accounts for retirement. If you withdraw your funds to payoff debt then statistics show that you’ll more than likely get into consumer debt again. So don’t fall into the easy trap of using your retirement money for paying for your consumer purchases.
2. Compound interest continues to work for me
If you withdraw your money early, then you lose one of your greatest powers! Compounding interest!! While you sleep dividends and capital gains are reinvested and continuing to grow your nest egg.
3. Better overall financial picture
Consolidating my 401k into one financial institution allows me to have a clearer vision of what my overall international/growth/small-mid cap/large cap/REIT/bond/money market funds holds are for my entire portfolio. With many disparent 401ks, then it makes it harder to know what my allocation ratios are at.
4. Ensures stock/bond ratios
Often times with have many different 401k funds all over the place, then it isn’t always easy to compute your stock to bond ratio. By having a complete picture then I’m able to make adjustments to my overall portfolio. This way I don’t have to go to multiple websites in order to get my proper ratio, which could lead to an error on my part.
5. Easier rebalancing of my portfolio
A couple of clicks of the mouse and I can easily perform my yearly rebalancing of my entire portfolio. After certain categories have outperformed others, then it is easy to get my funds in line with my risk tolerance and age-based ratio.
6. Vanguard keeps my costs low
I’ve been investing in Vanguard Funds, since I got my first job in 1999 after participating a lot in the John Bogle Diehards forums. Their costs have consistently been among the lowest in the financial industry and they are an extremely ethical! That isn’t something that a lot of companies could say after going through the 2008 financial crisis.
It took me way too long to finally pull the trigger and move my 401k. I have plenty of excuses to go around, but what motivated me the most in taking action was writing down my yearly and monthly goals.
I’d love to hear on whether you’ve rolled over your 401k or decided to leave it with your former employer. What were your reasons for either leaving or rolling it?