Rolling, rolling, rolling… How to do a 401(k) rollover

A few blog posts ago I spoke about retirement with a brief conversation about rollovers.  I wanted rollovers to have its own, more in depth, conversation.  You can rollover your employer account for two reasons, (1) You leave your job OR (2) You reach the age to withdraw without penalty (59 ½) and you are still working.  For the purposes of today’s blog post, let’s combine these circumstances and call them a “rollable” event.

When a “rollable” event occurs, you have three options: (1) Stay in your plan; (2) Cash out; or (3) Roll your account over. Let’s talk about the first two circumstances. If you have over $5,000 (each plan’s amount might vary slightly) in your 401(k) after separation from your employer, you have the option to stay in your planUnder $5,000 but over $1,000, your employer can roll your money into an IRA to avoid the administration costs of keeping such a small about in the company’s plan. Under $1,000, your former employer can legally “force you out” if you don’t make other arrangements for the money in your plan.  A force out is when your employer sends you a check for what’s in your account minus the mandatory 20% withholding.

Since we are on the subject of receiving checks from your 401(k), let’s discuss the cash out option. The cash out option is when you decide to take your money and run.  You receive a check for whatever is in your 401(k) minus mandatory 20% tax withholding. That sounds great, who couldn’t use some extra money in their pocket? Well, I will ask you the question that my father asked me as a child whenever I was in trouble, “[Is] it worth it?” And on this occasion, it isn’t.  There’s no such thing as a free lunch. With the cash out, even though you had 20% held immediately, (1) the amount you received is calculated into your income and in most cases, you have to pay MORE taxes on that amount and (2) you are subject to a 10% early withdrawal penalty if you are under 59 ½ at tax time.  On top of that, you are shorting your retirement goals. With that being said, who has money just to give away to the government?

So what’s the best option? ROLLOVER.  Rolling your 401(k) to an Individual Retirement Account (IRA) is a great move.  It gives you a wider range of options that are often less expensive that YOU pick. However, you also have the option of rolling your old 401(k) into your new 401(k). But for today’s post, I’m just going to discuss the process of rolling over into an IRA.

1. Decide where do you want your IRA. 

(a) Bank- some people like the convenience of having all their accounts in the same place.  However, many banks only offer banking options such as CDs and savings accounts. Some banks can provide investment options through their investment arm but I do caution you that these options tend to be more expensive than an online account.

(b) Online account- if you don’t mind having your banking accounts in separate places, I prefer online options.  They tend to be cheaper. (Although if you want to move your banking relationship, many of these online investment firms have banking options.) Look around for deals (i.e. get $600 when you roll your account over) and  make sure you read the fine print!

2. Decide what kind of an IRA will it be.

You should roll your 401(k), or other qualified plan, into a qualified account, a traditional IRA. I know that Roth conversions are very    popular now. But it is easier to do a Roth conversion once your funds are in your traditional IRA. Before making that jump, I strongly suggest speaking with your tax advisor.

3.  ROLL IT! 

(Most people want to handle this ASAP after they leave a company, but it can take up to 60 days for your separation to show with your 401(k) provider)

(a) Tell your IRA provider that you intend to roll a 401(k) over. They will either give you a form or provide you with the information needed  to tell your 401(k) provider to execute the rollover

(b) Call your 401(k) provider or go to your 401(k) online, most providers allow you to verbally request a rollover, and  handful of providers will send your check directly to your IRA company. If they don’t, and send the check to you, just forward the check with the proper paperwork to your IRA.

Note: The general rule in rollover land is this, “As long as you don’t get the money in your hands, then it is not taxable.” So most people get upset when they have a check in their hands from their 401(k). But with a rollover the check should read, “ (Your IRA Company) FBO (Your name).” The real question is, can you take the IRA check and deposit into your bank account. With a FBO, “for benefit of,” check, you cannot because the check is written to the IRA company for your benefit.

            My money’s rolled over. What should I do next? Invest! 

What are these things called Mutual Funds, really?

           When it comes to investing, so many people hear, “You should invest in mutual funds.” And with out question, most people do. So many people invest in mutual funds that, today, nearly half of American households own mutual funds. This number is staggering considering that the number of households owning mutual funds was 6% in 1980. The increase is due to the increased availability and participation in retirement accounts, where mutual funds are the primary, and usually only, investment option.

            With so many individuals investing in mutual funds, it should be surprising that very few mutual fund owners actually know how they work.  But it isn’t, because the working of mutual funds are clear as mud. Over the next few blog posts, I hope to unmuddy the waters.

What is a mutual fund?

Let’s begin with the definition of a mutual fund. defines mutual funds as “a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.”  The type of security that the mutual fund invests in depends on the objective of the fund. (We will discuss fund types in another post.) Each mutual fund has a ticker symbol. A ticker symbol is a unique five letter abbreviation used to identify mutual funds on the stock market. When purchasing a mutual fund, it is common to use the fund’s ticker symbol instead of its proper name.

The value of a mutual fund is determined by the value of the stocks at the end each trading day minus the liabilities or the expenses of the fund including management fees, the cost of keeping the “lights” on, etc. This value is called the Net Asset Value commonly called, “NAV.” The NAV is the amount that is quoted for the price of the Mutual Fund.  Note that since NAV is calculated at the end of the trading day, it is the prior day’s information.

For a simple illustration of how mutual funds work, I created my own fictional mutual fund. Since I love to shop, I have created a fake retail mutual fund called, TheIvyInvestor’s Retail Fund (ticker: IIRVX). It has three stocks for simplicity; but note, most mutual funds have hundreds of stocks.

 IIRVX opened on February 7, 2013 with 1000 shares outstanding.

Stock Symbol Company Share Price (as of 2/7/2013) Number of shares Value
JWN Nordstrom $54.91 100 $5,491.00
KORS Michael Kors $56.66 100 $5,666.00
M Macy’s $54.91 100 $5,491.00

As you can see, the average investor cannot afford to purchase 100 shares of these stocks, let alone this full portfolio, a group of holdings —i.e. stocks or bonds— in a mutual fund.  To get a piece of the “action,” you can buy a share of IIRVX for $22.23. This $22.23 will not purchase individual shares of Macy’s, Michael Kors, or Nordstrom directly; but it will allow you to participate in these companies’ growth by owning shares of the mutual fund which holds them.

 How was the share price of IIRVX calculated on February 7, 2013?

 The NAV is calculated:

$16,648.00 (value of the securities at the end of the trading day)

- $2,500(liabilities)

$14, 148.00

$14, 148.00/1000 IIRVX shareholders = $14.15 NAV.

 IIRVX’s value on  February 7, 2014 with 1100 shares outstanding.

Stock Symbol Company Share Price (as of 2/7/2014) Number of shares Value
JWN Nordstrom $58.79 100 $5,879.00
KORS Michael Kors $94.22 100 $9,422.00
M Macy’s $53.09 100 $5,309.00

How was the share price of IIRVX calculated on February 7, 2014?

The NAV is calculated:

$20,610.00 (value of the securities at the end of the trading day)

- $2,500(liabilities)


$18,110.00/1100 IIRVX shareholders = $16.46 NAV.

As you can see, NAV changes day-to-day depending on: (1) the prices of the stocks that the fund holds, and (2) the number of shareholders.

This week’s blog posts will be a series on mutual funds. The next few posts will cover:

1. How do you make money in a mutual fund and Tax consequences

2. An in-depth look into mutual fund fees

3. Types of mutual funds available

Getting started with investing

Today’s blog will be featured in Pull Magazine’s print version.

The costliest mistakes, in life and investing, are usually fear based. Successful investing does not require a specialized degree.  It does, however, require time and a plan. Many people believe that wealth and financial freedom is unattainable unless they win the lottery. That is not true.

When I present individuals with tools to produce long-term wealth through investing, I usually hear two things: “I can’t figure that stuff out” or  “I’m afraid I’m going to lose money.” I can’t figure that stuff out usually means, I’m afraid of making a mistake. Aren’t we all?  However, if you do not invest, you WILL lose money by losing out on the opportunity to earn money. Not investing could be the costliest mistake you make.

How? In 2000, if I purchased an item for $100.00, that same item would cost $135.28 in 2013.  Inflation decreases the value of money over time and erodes its buying power. If your money is not earning at that same rate as inflation, you are losing money. You must actively do something to counteract inflation.  This also means that in order to “make” money, you need to invest in something that will exceed inflation over the long term.

There are several financial products available; however, many will not exceed inflation. Bank savings accounts, money market accounts, and Certificates of Deposit typically do not exceed the inflation rate. In order to consistently exceed inflation, you must look to the stock market. Overall, the United States stock market has had positive returns during any 20 year period since the 1920s.  Considering that time period included the Great Depression, the stock market should not seem as scary over the long term.

Five Rules for investing

1. Stocks are risky.

The best way to guard against risk is time. In the short term, there can be jaw dropping, blood pressure rising, catrospic swings     in the market.  That’s why rule #2 is so important.

2. Patience is paramount.

  Investors who use a buy and hold strategy for 10 years or more, do well. Warren Buffet, the owner of Berkshire Hathaway and the world’s greatest investor said it best,  “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”

3.  Educate yourself.

Do not invest in a business that you cannot understand. The great thing is, we know more about businesses than we think we do. Look at your habits. Where do you do your grocery shop? Where do you buy gas? Where do you buy your morning cup of coffee?  Do you drink Pepsi or coke? We tend to be ardent supporters of certain brands. Why don’t you own a piece of them? Google is a highly useful tool to use when getting more information about companies.

4.  Use index mutual funds. Here is a great piece about finding good index funds from one of my favorite guides to personal finance, Kiplinger’s.

In most years, many standard mutual funds do not beat the market. As a result, an investment strategy that works well is buying a Standard and Poor’s (S&P) 500 index fund or a Wilshire 5000 index fund instead of paying a manager significantly more in investment fees to select what he or she believes to be the best funds.

5. Don’t overdiversify.

 When investing, many individuals spread their money too thin.  When too little money is spread over too many investments, you don’t realize many gains and it’s generally hard to evaluate how your account as a whole is doing.

Pick an index mutual fund and one or two stocks to begin investing.  If you aren’t able to reasonably purchase more than one stock, then don’t. I’m a proponent of purchasing round lots, which are 100 shares of a stock, when feasible. However, I do realize this can be hard considering the per share price of any given stock. My main point is to buy a large number of shares, as many as you can. You should feel comfortable buying a large number of shares if you follow rule numbers 2 and 3.

Investing is not hard.  It requires educating yourself and patience.  Many of the online brokerage firms such as Ameritrade, E-trade, Scottrade, Merrill Lynch, have great investment commentary available to read.  Find other people who invest and talk to them, exchange ideas. The key to investing is life long learning and patience.  If you can master those things, you will have a good time making money.

Demystifying the Alphabet soup of Retirement

Retirement. Everyone wants to get there but very few know how. When individuals receive their benefit package, it often contains information about how to enroll in a retirement plan, but not much else. There are a lot of retirement options - SSI, IRA, 401(k), 403(b), IRRA, Roth IRA - but what good are options if you don’t know how to use them? This blog post is part of an ongoing series about retirement. As a random fact, the names 401(k) and 403(b) come from the section of the Internal Revenue Code that allows them.

 Ideally, retirement assets should be compromised of savings and investments, social security benefits and if available, pension benefits (defined benefit plans). Unfortunately, the overwhelming majority of companies no longer provide pension benefits for employees. As a result, if an individual does not have a substantial amount of savings available for retirement, then they are forced to rely on social security as their sole source of income.  Often, social security benefits cannot cover day-to-day living expenses forcing many individuals to work longer or never fully retire.

But for those of us who have 20 to 30 years left until retirement, we have so many options available to us to save and secure our future. Let’s use them wisely.  There are two basic retirement options available - employer sponsored plans and individual retirement accounts.

Employer Sponsored Retirement Accounts (Defined contribution plans)

The type of business your employer has, in addition to the type of work it does, generally dictates the type of employer sponsored plan available. For instance, 401(k) plans are traditionally used by for profit, larger companies; 403(b) plans are used by non-profit organizations such as schools, hospitals, and churches; 457 and Thrift Savings plans are used by government agencies. Although most employer sponsored plans share similar qualities, there are some differences.

How much can I contribute? 

For 2014, the contribution limit is $17,500.00 for employees under the age of 50. Employees over the age of 50 are given the ability to accelerate their savings with a “catch up” provision and can contribute an additional $5,500.00. Traditionally, only before tax money was contributed to employer sponsored accounts. Now, some employers offer a “Roth” option in their plans, which allow contributions after tax money. However, Roth and Traditional contributions cannot exceed the allowable amount for the year. For example, if you are under 50, you can contribute $10,000.00 before taxes and $7,500.00 after taxes during the year. For information from the IRS, click here.

Employer Match?

In plans where the employer offers a match, those matching funds may not be yours immediately. Matching funds are usually set up on a graduated vesting schedule. Vesting basically is the time table for when your will be entitled to 100% of the money your employer has contributed on your behalf. The longer you work for the company, the more of the match is yours. Full vesting can take anywhere from five to seven years.  However, all of your contributions are immediately vested.

Individual Retirement Accounts (IRAs)

Individual retirement accounts (IRAs). Overall, there are two types of IRAs, a traditional IRA and a Roth IRA. IRAs are individual accounts that can be set up through financial institutions, such as a bank or brokerage firm (e.g. E Trade, Scotttrade, etc).  A traditional IRA allows you to contribute money before taxes; the money grows tax deferred, and you pay taxes on the money once you withdraw the funds in retirement. This is true as long as the contribution rules are followed. A Roth IRA allows you to contribute after tax money and have it grow tax free. No taxes are paid when you withdraw the money in retirement.

How much can I contribute? 

In 2014, the contribution limit for IRAs for individuals under 50 is $5,500. For those individuals over the age of 50, they are allowed an additional $1,000.00. For information from the IRS, click here.

There are also income limits to consider when dealing with IRAs. For a traditional IRA, if you have an employer sponsored plan at work, the amount of the contribution that the IRS will allow you to deduct will decrease as you make more money.  With Roth IRAs there are a few snags. For example, you cannot contribute more money to an IRA than what you earned in a given year. For individuals above a certain income (IRS website), the amount you are able to contribute can be reduced or completely eliminated.

What is the difference in contributions? (Roth v. Traditional)

With Traditional accounts, both IRA and employer sponsored, contributions before taxes, grow tax deferred, and are taxed when you withdraw. The benefit of making before tax contributions is the ability to lower your taxable income now.  If you make $80,000, and contribute $15,000, your taxable income is $65,000.  The drawback of not paying taxes now is that you will have to pay them later, and you have to hope that your tax bracket is lower than what it is now.

With Roth accounts, both IRA and employer sponsored, contributions are after taxes, grow tax free, and are not taxed when you withdraw.  The benefit of making after tax contributions is that you are able to position yourself in the future with a sum of money that is tax free.  The drawback of paying taxes now is, well just that, you are paying taxes now.

I suggest AT LEAST using your employer account to get the match, if available.  There are many calculators online to determine how much pre-tax contributions will it affect your take home. Use them. The best strategy is diversifying your taxes — contribute some pre-tax money and contribute some after tax money, either to a Roth IRA or a Roth employer sponsored plan.


Three words. JUST DO IT! There are a few things that can happen with old employer accounts.

One, the old account can sit around unmonitored. Unmonitored accounts are not a good idea. Employer plans can change investment options at any time. Sometimes the investments you thought you had can be phased out and your money sits around in a money market mutual fund doing nothing.

Two, you could be “forced out” of the employer’s plan because you don’t have enough money to stay in. Each plan and amount is different.  This force out could get you a check in your hand.  The money in your hand is now taxable at your ordinary income tax rate; and if you are under the age of 55, you could be charged with an additional 10% penalty. It’s not worth it.

Three, this is the best option. You can ROLL the money over to your new employer account, if able, OR (my personal favorite) ROLL the money into an IRA.  Why do I love rolling money into IRAs? It’s yours!

Investment Options

In a few weeks, I will discuss investing in more detail.