Back in April of 2014, I took a big career leap and left my steady desk job for the thrill of joining a start-up – where I still have a desk and a steady paycheck, but you know what I mean. I left behind one important thing when I started my new gig — my retirement fund. I needed to rollover a 401(k) before I felt I’d completely moved on. Fortunately, my new employers offered a matched on a new 401(k). Unfortunately, my only option was a Traditional 401(k), so I couldn’t easily roll over my current Roth 401(k).
Why, you ask? Because Uncle Sam and the IRS say so.
A Traditional 401(k) is a pre-tax account, so it lowers my taxable income (yay!) but it also means I’ll have to pay taxes on that money once I start withdrawing in retirement (boo…). A Roth 401(k) means my contributions were taxed before going into my investments. My income doesn’t get a tax break now, but I can take money out in retirement without Uncle Sam’s grubby fingers all over my fat stacks.
So, I had to make a decision about what to do with my original 401(k).
I had a few choices:
1) Leave it: I had enough money in the account (just north of $8,000) to qualify for leaving it alone.
2) Roll my employer’s contribution into my new 401(k) and roll the rest into a Roth IRA
3) Roll all of it into IRAs (one Roth and one traditional)
But wait, why two IRAs? While I had been contributing post-tax money into my 401(k), my employer had not. The contribution from my former employer needed to be rolled into a pre-tax account. My new, traditional, 401(k) would qualify and so would a traditional IRA.
After slight deliberation, I felt it would be easiest to roll my old 401(k) into two Vanguard IRAs – one Roth and one Traditional. I already had a traditional IRA set up with Vanguard, so it took me all of five minutes to get a Roth IRA prepped for my roll over.
It’s incredibly simple to rollover a 401(k) into a Vanguard IRA(s). I started by doing what any millennial would do:
I clicked on “start your rollover online”. After answering some simple questions they directed me how to split my 401(k) into the two IRAs. I found it easiest to just ask the kind folks in charge of my current 401(k) how much had been taxed (my contributions) and how much had not (the employer contribution).
I then filled out paperwork from my former employer to start the rollover process.
Then I hit a snag.
My former employer was in the process of moving their 401(k) program from a company called Plan Destination to Fidelity. I had been warned I had to rollover a 401(k) before the black out date when the change occurred. So – even though I filled out my paperwork on time, they didn’t finish it in time on their end and started rolling over my 401(k) to Fidelity.
Now I had another decision to make.
Do I just leave my 401(k) with Fidelity – another reputable brokerage firm – or continue with the initiation to rollover into Vanguard? Admittedly, another Fidelity product caught my eye: the 2% cash back card, because you can put your cash back into an IRA. After some more deliberation, I decided to go ahead and move it all to Vanguard. I liked the idea of simplifying where my money would be, plus I had a relationship with Vanguard and loved their customer service.
To get my rollover started, I simply called Fidelity and told them I’d like to rollover my funds to existing IRAs with Vanguard. I made sure to verify the Roth (post-tax) funds would be on one check with the pre-tax funds from my employer’s contribution on another.
Unfortunately, another small inconvenience occurred.
If my paperwork had been processed properly prior to the blackout date, I could’ve just had Plan Destination roll my money over to Vanguard (by sending checks to a Vanguard P.O. Box) with no problem. Fidelity didn’t play that way. Instead, they insisted on sending me the checks and then I had to send them on to Vanguard.
I called Vanguard to explain I would be mailing in the checks myself, verified the address I should send them to and asked if I needed to do anything else. The kind customer service rep recommended I write a brief letter detailing exactly where each check should be deposited, even though it would be detailed on on the check.
Taking his advice, I wrote a quick summary of the amount on each check and which type of IRA it should be deposited into and the corresponding account numbers.
The checks showed up about a week later, and I walked them over to the post office, sprang 63 cents for a stamped envelope and dropped them in the mail. Like magic, I saw the funds in my Vanguard account three days later.
Many people find the most stressful part of this process picking the funds for your investments. I am by no means a professional in this arena, and had to seek a lot of advice from my Dad about setting up my first 401(k). As a general rule though: the younger you are the more risky you should be. 100 – your age = the percentage you should have in stocks. While some fight that it isn’t the case anymore, it’s at least a good suggestion for the young investor. Another option is to invest into a target date fund to get started and ensure your money is invested and not sitting in cash!
Wait – you don’t even have a 401(k)?!
GASP! I know not everyone feels they can afford to be contributing to retirement yet, but if your employer offers an employer-matched 401(k) then you best be investing. At least enough to get the match. Otherwise, you’re throwing up the finger to free money. That wasn’t a typo. FREE MONEY! Still thinking about it? Then please read my post on the magic of compound interest or this one breaking down 401(k)s #MillennialStyle.