by Hope
I received my last paycheck from my W2 job this past week. I love my new found freedom. But now I must start making some decisions, beginning with what to do with my 401K. It’s not a large amount, but it is several thousand dollars. I desperately need 401K advice.
The question is, what to do with it? To be honest, I’m pretty ignorant when it comes to all things retirement related. It is time for me to get serious about it.
Where do I start? I am happy to say that I’ve chosen wisely in the funds I’ve invested in and have had a pretty decent rate of return over the last 6 months. I think I’d like to stay involved in the day to day management or maybe month to month.
Advice Needed
Give me your best advice…roll it over to a Roth IRA or something else? What are my options as a self employed. Right now, the fund is with a company called VOYA, one I’d never heard of prior to this. But I know there are many options for self managed accounts as well.
To be honest, I don’t even know what questions to ask. Perhaps there are some resources you recommend to teach me more, the basics specifically.
You may also check:
- Frustrated With Great Lakes
- Here’s What I Learned About Aflac
- Sample Letter When A Bank Rejects You For A Loan
- So How Much Did My Physical Therapy Cost
Hope is a creative, solutions-focused business manager helping clients grow their business and work more efficiently by leveraging expertise in project management, digital marketing, & tech solutions. She’s recently become an empty nester as her 5 foster/adoptive kids have spread their wings. She lives with her 5 dogs in a small town in NE Georgia and prefers the mountains to the beaches any day. She struggles with the travel bug and is doing her best to help each of her kids as their finish schooling and become independent (but it’s hard!) She has run her own consulting company for almost twenty years! Hope began sharing her journey with the BAD community in the Spring of 2015 and feels like she has finally in a place to really focus on making wise financial decisions.
Was it funded with pre tax dollars? If so, you would have to pay taxes to roll it to a Roth IRA. You should probably do a direct rollover to either a Roth or Regular IRA depending on if you can pay the taxes. Definitely do some research before making the decision. Do Not cash it out, you will be penalized and possibly taxed if you do.
You will be taxed heavily if you cash it out, I agree, don’t do that.
Taxed AND penalized (10%). Between the two, you’d have to pay 40-50% of it back in next year’s taxes
Unless you were contributing to a Roth 401k (after tax) you will have to roll it to a traditional ira (or pay taxes on the money to convert to a Roth). As far as brokerages. I personally use Wells Fargo’s wells trade but that’s where I have most of my accounts and I got into a deal that gets 100 free trade so per year. If I was going to open an account now i would look at to ameritrade, fidelity, vanguard and Charles Schwab. Depending on how often. You are going to invest and what in one may be better than the other.
This article seems somewhat helpful. The first option isn’t available to you as a contract worker but brokerage or mutual fund IRA seem to be the route you will need to choose from.
It also talks about the step by step process to ensure that you don’t end up with transaction fees and penalties.
http://genxfinance.com/how-to-roll-over-your-401k-when-you-leave-or-lose-your-job-the-401k-rollover/
If it is pretax, you need to roll it to a traditional IRA. You can do that probably at Voya or move it to Fidelity or Vanguard. You cannot afford the taxes so please don’t roll it to a Roth IRA if it is pretax.
Roll it over to a traditional IRA. I use Vanguard, should be fine for anyone. Since you don’t know much about percentages or stocks/bonds/equities/etc (me neither) just put it in a Target Retirement Fund close to your year of retirement. You can always move it around to another company later. Depending on your companies Voya plan, it might not be awful to just keep the money in there. It really depends if they have high fees or not.
After that, I’d look into a solo 401k so you can stay in the habit of contributing to your retirement while being self-employed.
Or you can always roll over your 401k to a ‘self employed 401k’ option like Fidelity. I would definitely avoid paying taxes.
I agree with above. Although there is probably no rush. Call Vanguard and do a 401K rollover(they write the check directly to both you and Vanguard) and invest it in an S&P 500 index fund. VTSAX is the one most recommend, but I think it has a $10K minimum. If not there is a similar fund with just a slightly higher fee. Vanguard usually has about the lowest fees in the business. Should be a very easy thing to do. Set it and forget it.
I agree with JayP. This is what I have done with all my 401ks when I’ve moved on from employers. If you have $3,000 in your 401k you can invest in VTSMX instead of VTSAX. One of the most important things to remember is to look for a fund with low fees as those will take money away from you over time.
Jim Collins wrote a great stock series on his blog that you might want to read through to get a better idea of options and how to handle this situation. It’s an excellent overview. http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/
Something else that might be useful for you to know: When you contact a company like Vanguard or Fidelity, they will help guide you through the process to roll over your 401k into an IRA and they will often contact the company you’re currently with to take care of the paperwork. So they’re very helpful and you don’t have to know all the steps when you contact them.
Love Jim Collins!
Vanguard has really low fees, just call them and ask them to move it for you into a rollover account. You can always move it to another company without penalty.
Have you been told that you have to move it? There may not be a rush to move it right away. My husband left his 401(k) accounts where his previous employers’ held them until we decided to consolidate them to Vanguard. Compare fees at Vanguard with fees on the funds you have through Voya to decide what to do if you don’t need to move it right away.
the Betterment app has one of the easiest roll-overs I’ve experienced. I would look into it. It might be a good place to stash the money until you have more time to better research your options. After 6 or months it gets much more complicated to roll-over.
Roll it over to a Traditional IRA (Not Roth), use a direct transfer rollover, by opening one with a good instution, Fidelity, Vanguard, both very easy, then filling out the forms to request a direct rollover.
If you don’t do a direct rollover, and just cash it out they automatically withhold 20%, but you still have to redeposit the full value of the 401k (e.g. come up with that missing 20% out of your own funds) or be penalized with early withdrawal fees for the missing portion.
Again I’d advise going for a traditional IRA in order not to get hit with conversion taxes, especially during a time of transition. You can always look at converting the traditional IRA to a Roth IRA once you’re in a stable state and know you have the extra money budgeted to cover it.
I would also like to add that you shouldn’t need to manage your 401k day to day or even month to month. Once you pick a fund just check in every 6 months and reallocate if needed (only if you have a plan). Playing with stuff month to month is getting way to into market timing. Especially for an account with just a few thousand dollars. The market everywhere went up up up the past 6 months like crazy. I wouldn’t expect the same returns in such a short time frame in the future.
Agree with those saying you shouldn’t be managing day-to-day or month-to-month. Everyone thinks they can predict the market and nobody really does. Low-fee index funds are your friends.
Also – when I knew absolutely nothing about money I called Vanguard to help with a rollover and they basically took care of it all for me over the phone. Super easy, don’t be intimidated.
The absolute last thing you need to do is actively manage your retirement money. Open an account with Vanguard, call them up, tell them you want to roll over an old 401(k) into a traditional IRA (not a Roth, because for a Roth you’d have to pay taxes now, which you can’t afford), do what they tell you to make that happen, and put the money in a target date retirement fund, and leave it there.