Rich Girl Roundup: The Easiest Way to Roll Over Your 401(k)

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As of May 2023, more than a trillion dollars worth of 401(k) assets were left behind by former employees. Here's how you can easily roll over your 401(k), why you should, and the rare instances where it might make sense to track it but leave it as is.

As a reminder, we are not licensed financial professionals and this is not financial advice. Please do your own due diligence.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Transcript

Transcript

Katie:

Welcome back Rich Girls and Boys to the Rich Girl Roundup weekly discussion of the Money with Katie Show. As always, I'm your host, Katie Gatti Tassin, and every Monday morning we are going to dig into an interesting money topic. Here is a quick message from our sponsors.

Okay, before we get into it, this week's upcoming main episode is about being a Henry or as we affectionately dubbed it for Rich Girl Nation, the Henrietta. AKA you are a high earner, but you are not yet rich. So the money math is a little bit different for this population. There's a few more things you got to consider. So we are going to go into our best tips and tricks for the high earners to move those folks from the high income brackets into the high net worth brackets. Alright, onto the roundup. Henah, what is this week's question?

Henah:

This week's question came from Carolyn Y. Can you walk us through rolling over a 401k or equivalent account when leaving your job? And first the disclaimer that I will throw out so you don't have to, Katie, is that we are not licensed finished professionals and this is not financial advice. So please do own due diligence. But I have been in this situation a couple of times now and I feel like the longer I wait to roll something over the more of a headache it ends up being or becomes more complicated some rules. So Katie, can you maybe walk us through why you should roll over that 401k?

Katie:

For sure. Okay. So I would say there's a couple general reasons that people often point to for why they would opt to do this. The first is that people just straight up forget them or they leave them behind. So maybe it's a job from early in the career, they weren't contributing very much money, they weren't really thinking about it very hard at the time. And so they leave the job, they move on and kind of forget that it's even there. And so rolling it over and getting it into your control is just kind of a way to make sure that that doesn't happen because obviously you don't want to leave money on the table. The second reason is that some plans, I have never personally encountered this, but I have over my years of talking to folks about this, spoken with some people where they basically said my 401k plan at my company had a really weird situation where if an employee left the company and had left the 401k behind with the plan provider, that after a certain amount of time the account would actually be cashed out. So the investments would be sold off and the plan administrator would no longer be managing that plan for the person. And so

Henah:

Would they get a check in the mail?

Katie:

No, no, no. It would just sit there in the accountant cash was the impression that I was left with was like the money is still with them but it's not invested anymore. So that is another risk that I think could be, and again, I said I haven't actually personally encountered a plan that does that, but it's on my radar. That is a reason that people have cited in the past for I wanted to get it out of there because I knew that after a certain amount of time there was a potential that the account would get cashed out. The third reason is that sometimes 401k plans and these plan administrators have higher than usual fees that you probably don't want to keep paying. Obviously when you have the 401k through your work and you are actively contributing to it and you're getting that juicy tax break and all that's lovely, maybe you're okay with paying the extra 10 to sometimes like 50 basis points for the management of that account. But once the money is no longer being contributed to and it's just sitting there in the account and you've moved on, you don't want them to be continuously skimming their fees off the top of it every year because it's going to eat into your returns for no reason. So that's another reason.

Henah:

Yeah, that reminds me of the teacher pay episode we did about the 403B fees that they had to incur. So yeah, those are all great reasons. I think for me personally, I had an issue where they were going to start charging me or moving stuff out of the fund as you had said. So what options do we have? I think there's a couple different paths you can take and one of them I believe involves rolling it over into something else. But my other follow-up question is what if you want to change your account type from a traditional to a Roth?

Katie:

Ah, okay. So yes, I would say that most common avenue that people take the most common path is rolling your 401k into an IRA. So one thing that I know people get hung up on sometimes because I remember having this question myself and then I've gotten this question in email before is, Hey, I know there's a contribution limit to an IRA, am I using that limit up by rolling over my 401k? And the answer is no, rollovers do not count toward annual contribution limits because that represents contributions from the past. You're really just moving money around. So you could move a $20,000 traditional 401k, roll it into a traditional IRA and then still have your $6,500 in 2023, your full contribution limit eligibility,

Henah:

And there's no tax bill with that.

Katie:

There is no tax bill with that because you're going from traditional to traditional, so you're wanting to match the tax status. So the reason you would do it is because the IRA that you are self-managing often is going to provide more investment choices and potentially lower fees than what the 401k provider did. And when you roll a traditional 401k into a traditional IRA or a rollover IRA, you have no tax implications. And if you roll a Roth 401k into a Roth IRA, again no tax implications because you're matching same for the account type, the tax status. But if you were to take a traditional 401k and you were going to try to roll it into a Roth IRA, then you would pay taxes on that Roth conversion. And some people do this without realizing that I think or without thinking about the tax rate that they're going to be paying on that conversion because it's going to be treated like ordinary income.

So it's going to be taxed like it's just regular old income that you're taking home. So it's going to get stacked on top of your other forms of income, which can sometimes result in quite a high tax rate that you'd be paying on that money. So typically I would say unless you're in a year where maybe you have lower than normal earnings or maybe you are going back to school and so you have no income and so you're rolling over that 401k and you want to turn it all into Roth. Now typically that's something that I would say is not common to make that Roth conversion while you're still actively working in earning.

Henah:

Okay. So if you're rolling it over to an IRA, but I think there's maybe two other options that people could do with their 401k.

Katie:

Yes, you can either roll it into a new employer's 401k, so if your new jobs plan allows for that, you could roll the old 401k into the new one. And then that kind of simplifies managing multiple retirement accounts, kind of just be keeping all the money in one bucket so to speak. It's also nice if you are someone that does the backdoor Roth IRA, and so you don't want any pre-tax money in a rollover IRA because that will create an issue for you there. So that's another reason why people will sometimes try to go from 401k to 401k. The only call out I would have is just make sure that your new 401k plan is actually good and by good I mean it doesn't have crazy fees and it has the investment options that you're happy with. And then the third thing that you could do is cash out the 401k, but that's generally not recommended because it'll trigger taxes and penalties.

I wouldn't even consider cashing out the 401k as an option that's on the same playing field as these other two because if you're under 59 and a half, you're going to pay a 10% penalty and I believe taxes. And then if you're over 59 and a half, you probably are not trying to cash out or liquidate the entire 401k all at one time. You probably want to keep most of it invested. You're only going to be taking out what you actually need to live on, otherwise you'd be paying taxes on money that you don't really actually need to be paying taxes on all at once. So it's kind of like an inefficient tax planning thing. So

Henah:

The most recent time I rolled mine over, I used a service called Capitalize and for transparency, Capitalize has been a sponsor of Money with Katie before, but I think you and I have both organically used it so I can share a little bit about my experience with them. But I think Katie, you've done it three times now with them, right?

Katie:

Yeah. I actually have never done a 401k rollover with without them. So I don't know how to do it without Capitalize. I never have

Henah:

A baby. No, I've done it once, but it's a lot more paperwork and a lot more like calling and trying to figure out. So I was really excited to go through them. And again, this is just organically we're talking about them, but basically what I did is I signed up online, I connected my accounts, and then I started the process and I had some forms that I had to fill out that allowed them to do their rollover on my behalf. And then they set up a call with my former provider. I really liked that they set up the call for me and then they just called me once they were on the line with that person and then they were just like, Hey, do you allow us access or do you allow the capitalized rep access to handle this conversion? And I was like, sure. And then they pretty much did everything. And then I did the direct rollover from one provider to the other directly. I didn't have an indirect rollover and then that was it. So the process was a little bit more complicated for me because I had moved cross country and changed my name after marriage. So it involved a couple extra steps, but overall it was way easier than when I tried to do it on my own. Does that kind of mimic what your experience was like?

Katie:

Yeah, it was really simple. I don't remember anything of note of the rollover process itself. I do remember getting the envelope in the mail with the check that had the amount on it, and then it included the envelope that I had to put everything in that was already pre-addressed and I just had to sign it and then put it back in the mailbox. Oh,

Henah:

So that's an indirect rollover. I never touched any money. Nothing ever came to me personally. It just went straight from Voya to Guideline or Betterment, wherever it went.

Katie:

Yeah, I had mine sent to M1 Finance, and so I'm not sure, it probably just varies on either the provider of the retirement account or the brokerage firm that you're sending the assets to, but I didn't have the option to do a direct, it was just like they give you the check and then you have to send it off. I know that they gave me a 10 99 R. There is a tax form that it creates because you're taking a distribution, but it doesn't actually create a tax impact. It's just you have to then file that form that there was, I want to say a qualified distribution for the purposes of the rollover. So keep an eye out for that 10 99 R form. At the time, it freaked me out. I was like, wait, is this going to impact my tax liability this year? But if you're doing same traditional to traditional or Roth to Roth, it won't make any difference.

Henah:

That's a good call out. I had a couple other questions or caveats. So could you just leave your 401k with your previous employer if they have something like a really great low fee and a portfolio that's outperforming what you could probably get at your new 401k provider? I think,

Katie:

Yeah, I mean, I don't think there's really anything wrong with leaving it behind. As long as you are tracking it, it's there. You're happy with the investment options and the fees are low. Yeah, I don't think there's necessarily anything wrong with that.

Henah:

Okay. And then I read online about 401k balance minimums and that if your balance is less than a thousand dollars, your employer could cash out your 401k and that if it's less than $5,000, they might force you to move it. And then I've heard that you should not roll over employer stock because it creates this thing called a net unrealized depreciation.

Katie:

Interesting.

Henah:

So that would give you a big tax bill, I believe.

Katie:

I think so. But that seems like one of those 505 level tax laws where I'm like, I'm not really sure the intricacies of that, but it's a good call out. I think I can kind of see why that might be happening.

Henah:

Well, we'll just close and say that ask your financial advisor, CFP, CPA.

Katie:

Yes, consult a CPA if you're in that situation. But otherwise, that is all for this week's Rich Girl Roundup, and we will see you on Wednesday to talk about the realities of being a hen or a Henrietta, and how to leverage those specific types of investment accounts and opportunities and things that you should be aware of to supercharge the growth of your net worth.