What is a 401K rollover and why should you do it?

Introduction

A 401k rollover is the process of moving funds from one retirement plan to another. There are several reasons why you might want to do a 401k rollover. For example, if you quit or change jobs, you might be able to keep your previous employer's 401k plan, but it might have high fees or limited investment options. Also, managing multiple 401k accounts can be cumbersome and confusing. Therefore, by doing a 401k rollover, you can move your funds to a new retirement plan and maintain the tax benefits while enjoying more convenience and diversity in your investments.

What are the types and pros and cons of 401k rollover?

There are two main types of 401k rollover. One is to move your funds to your new employer's 401k plan, and the other is to move them to an individual retirement account (IRA). Let's look at the pros and cons of each.

1. Rolling over to your new employer's 401k plan

    - Pros: You can manage your funds in one place, which is convenient, and you can also borrow more money from your 401k loan if your rollover amount is reflected. Also, if you retire after age 55, you might be able to withdraw your funds without penalty before age 59.5 in some cases.

    - Cons: You might have to pay higher fees and have limited investment options. Also, if your income is high and you want to do a backdoor Roth IRA, you might have tax issues if you have a balance in your traditional IRA.

2. Rolling over to an IRA

    - Pros: You can pay lower fees and have more investment options. You can invest in not only mutual funds, but also stocks, ETFs, and other assets. Also, it is easier to do a backdoor Roth IRA.

    - Cons: You cannot borrow from your 401k and you have to pay a penalty if you withdraw before age 59.5. Also, if you rollover your traditional 401k to a Roth IRA, you have to pay taxes.

How do you do a 401k rollover?

When you do a 401k rollover, you must request a direct rollover from the plan administrator of your new account. This way, you don't have to worry about taxes or penalties. If you receive a check from your previous 401k and deposit it into your new account, you might be considered as withdrawing before age 59.5 and have to pay a penalty and taxes. 

Therefore, I recommend the direct rollover method.

How should you invest after a 401k rollover?

After a 401k rollover, you should start investing right away. 401k is an account for saving for retirement, so it is important to have a long-term perspective and a stable and efficient investment strategy. The investment strategy that I personally recommend is the all-weather portfolio investment strategy. This strategy is a way of diversifying your investments across different asset classes depending on the economic situation, reducing risk and maximizing returns. 

Explore the links for more insights!

• How much Retirement Savings Do You Need?
• Understanding Social Security Benefits: A Comprehensive Guide
• The 4% Rule for Retirement Fund Withdrawals
• The Perfect Plan for Retirement Savings: 8 Key Elements for Employees
• How to Save for Retirement with 401K