I‘ve been at my current day job for well over a decade now, and I enjoy working there. At times, however, it pays to be prepared for any eventuality. For me that means planning ahead in case I were to leave my current job, or be laid off. It isn't a remote possibility as there have been layoffs in the past couple of years. While I feel reasonably secure I still plan on making sure I'm planning ahead.
So how am I planning ahead? First things first, I'm making sure that we're set financially. I've saved up a nice emergency fund, I've got a nice second income though my online ventures like this blog, and I'm making sure we have all the insurance necessary to plan for any eventuality.
Another thing I'm thinking about is what I would do with all of the money that is currently living in my company 401(k) plan. I've currently got two 401(k) plans at my day job, one that they started out with back when I first started that has quite a bit of money in it (that will be transferred over to the other 401(k) soon), and a second plan that they opened a year or two ago.
Neither plan is particularly great and I know I could do better on fees by transferring the money elsewhere if and when I do leave my job.
So today I decided to look into what it would take to do a 401(k) to IRA rollover from my company 401(k) plan, to my account at Betterment.
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How Does A 401(k) To IRA Rollover Typically Work?
When doing a 401(k) rollover, here's the process you would typically follow.
- Open an IRA with the company of your choice: If you don't already have an IRA open, you'll want to open an account with the brokerage or mutual fund company of your choice. Personally I have an account with Betterment and Vanguard for most of my investing needs. Opening an account shouldn't take more than a few minutes some afternoon.
- Get forms for your old 401(k) plan provider: You'll want to talk with your plan administrator or account rep for your 401(k) to make sure you don't have any plan limitations on rolling funds over. Then you'll want to get any necessary forms that you'll need to fill out and verify with administrators what information you'll need from your new IRA account company.
- Contact IRA provider, verify account information: Contact your new IRA company rep to ensure that your account is opened and ready to receive funds. Then get the information from them that you need for your forms from the old 401(k) provider.
- Fill out 401(k) rollover forms, confirm what type of rollover you're doing: When doing a 401(k) rollover there are a couple of different options. You can do a direct rollover of funds (or trustee-to-trustee transfer) where the 401(k) company transfers your balance of funds directly to the new company. You can also do an indirect rollover of funds where the company cuts you a check for the balance of your 401(k), minus tax withholdings of 20%. Then within 60 days you have to deposit 100% of the 401(k) balance amount into your new IRA or be subject to taxes and penalties for early withdrawal. Because an indirect rollover is much more complicated, requires you to have money outside of your 401(k) to deposit into the new account within 60 days, I personally find a direct rollover far preferable.
How Does Betterment Implement 401(k) Rollovers?
Since I already have accounts with Betterment.com and I'm pretty happy with the service they offer, I wanted to look into what it would take to rollover my 401(k) funds to an IRA with them. What process do they use – a direct rollover or an indirect rollover? Would I be able to rollover my Roth 401(k) funds as well?
Here's what Betterment told me about the process of rolling over a 401(k):
Thank you so much for inquiring about rolling over a 401(k)/IRA. The general rule is to rollover only Traditional funds into a Betterment Traditional IRA, and only Roth funds into a Betterment Roth IRA. Rolling over an IRA, 401(k), or any similar plan into Betterment is generally simple, painless, and without any negative tax repercussions.For rolling over IRAs, we use the indirect rollover method for ease. This means that the funds go through you. You simply request a full early distribution from your current provider, and then re-deposit those funds into your Betterment IRA within 60 days. As long as you complete the rollover within this time period, there are no penalties for doing so. You will simply need to note the rollover on Form 1040 (usually on line 15) on your taxes.For rolling over 401(k)s, we use the direct rollover method, to avoid any withholding of funds from your current provider. This is where your current provider sends us a check of your 401(k) funds directly (instead of going through you). This process involves you filling out one or two simple forms from your current provider. We assist you through the entire process, and are here for you, should you have any questions. Just let us know when you'd like to get started!
So for rolling over funds in a 401(k) like I have, it sounds like they use the direct rollover method. That means the funds would be going directly from my old 401(k) account over to my new Betterment IRA. No need to worry about having extra funds available in order to fully fund the new IRA account after 20% in taxes are taken out – as with the indirect rollover method. If you're rolling over another IRA Betterment will do the indirect rollover method since the old IRA provider is not required to take out taxes, like with a 401(k) indirect rollover. You'll have 60 days to complete the transfer.
So how to get started? The FAQ talks about how to start the rollover process.
You have two options to start the rollover process. When you set up your IRA account, we will ask you how you would like to fund it, and you can select the rollover option here. Alternatively, you can elect to rollover your 401(k) at a later point by going to the Transfer tab, selecting your IRA account from the dropdown menu, and clicking the “Rollover IRA or 401(k)/403(b)” button. When you select either option, we will follow up with an instructional email containing a few simple steps to complete the process.
So it sounds like to get started you just open an account with Betterment, and select rollover as the funding option, or open an account and then go through the “transfer” tab later on.
Since I also have a Roth 401(k), it sounds like I should be able to do a direct rollover of those funds into my existing Betterment Roth IRA as well. Once again, just a matter of filling out the forms from my 401(k) company, and giving them my account information for my Betterment account.
Why Am I Using A Betterment?
I've written about Betterment on this site more than once, and I've been extremely happy with their service in the 5 years that I've been with them. Originally when I first opened my account with them their fees were a bit high. In the past year, however, their fees dropped significantly, to around a 0.25% annual fee for most account holders. I now think they offer a better value to investors, including myself.
Not only do they offer low fees, but they offer a great easy way to invest automatically in the entire market via ETF index funds that stays balanced according to your requested asset allocation of stocks vs. bonds. You never have to go in and re-balance your portfolio, they do it for you on a quarterly basis. They're a great company – one I highly recommend. If you're looking for a place to rollover your 401(k), they're worth a look!