How to make a 401k Rollover into an IRA and our Investments

Most people jump ship from their job and forget about their 401k, 403b or 457 rollover options. The majority (56%) of those ages 18-34 still have an old retirement account at a previous employer. If you’re 35-44, you are part of the 40% that have also not rolled over previous retirement accounts.

How much is that worth?

Well Americans lost more than $1 Trillion dollars to old forgotten 401ks. Even more if we consider the compounding interest opportunity.

So let’s break down what rollovers are, tips on what to look out for and what to do next once your have access to your hard earned money. And just for the sake of this conversation, 403bs and 457bs operate in the same way as 401ks. They are just different products for different industries (sort of).

Table of Contents

Wait What’s a Rollover? And Why is it Important?

To keep it simple, a rollover is when you move retirement funds from one eligible retirement plan to another, such as from a 401k to a Rollover IRA. Additionally, your financial institution will report the rollover distributions to the IRS and it may be subject to federal income tax withholding.

Main reason why people use a rollover?

The Majority of 401ks have limited investment choices in comparison to an IRA. Most of those investment options skew safer and have more management fees.

In contrast, IRA offer more types of investments such as individual stocks, bonds, REITs and exchange traded funds (ETFs). In some more complicated structures, you can even invest directly in Real Estate.

Yeah, an IRA can buy a home. Wild but true story.

In the process of conversion, the user also pick up more risk. It pays to be mindful of having a well-diversified portfolio and a great investment strategy.

Your Rollover Options and the Pitfalls

Let’s go over the Options

When you change jobs, you generally have three (well four) options for your 401k plan:

The best option is to do a 401k rollover to an individual retirement account (IRA). Please note that if you move money from a “traditional” retirement account to a ROTH version, you will be taxed.
While the most efficient option is rolling over to your new 401k. This way all your money is together and your investments are streamlined.
You can always cash out BUT that’s the most costly. You end up paying all the deferred taxes at once like it’s a bonus. You will also incur the IRS withdrawal penalty
There are rare instance when you can leave your money with your old employer but it’s likely that your investment won’t grow most of the time. It could shift and act like some odd retirement savings account that doesn’t grow.
Finally, you can move it to a ROTH IRA. Like I stated before, you will be tax but now all of those investment dollars will be able to grow tax free. It gets complicated so do consult a certified financial planner (familiar with tax planning) and/or your CPA (also familiar with tax planning). Not all CPAs are well versed on every aspect of Accounting.

The Massive Pitfalls of Rollovers

There are shortfalls that you need to consider as well:

Always consider the WHEN. If you make a rollover now, you are likely taking it while the market is down. It’s a build in loss which is often unavoidable. If you don’t get this part, leave this to a certified financial planner with investment knowledge.
When you roll over your IRA you must adhere to certain rules. You can avoid losing any of your savings if you understand and follow IRA withdrawal rules and process for rolling over your account..
Sixty-Day Rollover Rule. IRA rollover rules give you 60 days from the day you withdraw all or part of your retirement investments from one financial institution to open and roll over your funds to an eligible account with another institution. If you don’t open your new IRA within 60 days, the money you withdraw will be taxed as regular income.
Extra Penalties before tax time. You might be charged an additional 10 percent penalty if you’re under age 59.5 and your withdrawal doesn’t qualify for an exemption. The last two are a double dose of investment losses.

talking about investments with friends — Wait don’t you talk about investments with our friends?

Weighing the Pros and Cons of a ROTH Rollover Conversion

An IRA rollover opens up the possibility of switching to a Roth account.

Under the IRS provisions for Roth IRAs, you have to pay taxes on the money you contribute when you contribute it, but there is no tax due when you withdraw money, which is the opposite of a traditional IRA.

While this might be confusing, it’s worth noting that this is all with after-tax money and will be record on your tax return.

More stipulations include:

Be careful of Annual Income contribution phaseouts (refer to the IRS press release for 2022),
There are no required minimum distributions (RMDs) at age 72, and
Easier withdraw of contributed funds with no early withdrawal penalties, but
Penalties are still added for withdraws of investment earnings.

Now that We’ve Done the Conversion, What’s Next?

My wife shifted employers. As such, she took a $67,000 401k rollover to her traditional IRA.

This provides additional investment flexibility in the long run but we had to make sure that the money rolled over properly. The company sent us the check and we had to scan it over immediately to the next custodian or trigger the 60 days penalty.

This mistake would have cost us at least $10,000 in taxes. So make sure this step is done correctly to save you money. Next part, what do we do with the money?

Late phase business cycle and 401k roll over opportunities for our IRA

Market Turbulence, High Inflation, and Late Stage Investment Shake Ups

This late stage in the business cycle (see graphic above) is characterized as moderate growth, credit tightening, earnings under pressure, policy contractions, and new inventory growth and sales growth trailing.

In this phase, there will be in a drop in information technology. Anyone over leveraged on tech including indexes which feature tech will take a hit. But that inversely offers quality at a discount for people with cash on the side.

As the economy slows down, an intelligent investor would be prudent to consider Consumer Staples, Health care, Energy, and Utilities.

For our household, we are purchasing deep value stocks like $GOOGL, $AMZN, $PYPL, $ABNB and $LOW. Our goal is to rebalance on sectors and maintain solid positions in US Staples, Dividend builders and Long term discretionary.

In August, we will sell off mildly productive equities and hold on $50,000. Every week, we will invest $2,500 until the next pullback or correction. We will also watch the Federal reserve decision during September and November.

This rollover presents a unique opportunity to BUY LOW and #HODL. The game is all about investing for future wins.

Investing 101 during high inflation and 401k rollovers opportunities

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Disclosure: This post is brought to you by the Neighborhood Finance Guy. We highlight financial literacy information, resources, rollover strategies and more on your way to money management goals and personal wealth. Our goal is to help you make S.M.A.R.T.+E.R decisions with our money. We do not give investment advice or encourage you to adopt a certain investment strategy. Your personal finance is up to you. If you take action based on one of our recommendations, we don’t earn a dime as of 5.2021. We operate independently.

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