Make the best move for your retirement plan: why you should rollover to an IRA right away.
I felt a little guilty when I realized I still had to get moving on consolidating my various 401K accounts into a rollover IRA. You see, I was once a former independent technical consultant (one of those “traveling” or “freelance” engineers during the dot com years who had jumped from one employer to another), who had chased numerous short term projects with the help of various headhunting agencies when the job market was hot. I had not only left a trail of legacy code in my wake, but also amassed a collection of minuscule 401K accounts tied to a variety of plans and invested in a variety of funds, discount brokers and institutions. Each account is far from significant, but taken together — well, they represent the bulk of my retirement funds!
I had been meaning to roll over these funds at some point (I’ve only been partially successful). But life has taken over, causing this task to slip in priority. Well I just caught this video which has now lit a fire under me: I’m going to have to get serious about this! Watch this and you’ll see what I mean:
Click this link or the image below to watch the video.
The expert here echoes what I’ve already known for a while but have not really taken as seriously as I should: that once you’ve left an employer, it’s never a good idea to keep your money in their 401K plan. Once you leave a company, you are faced with several options on how to deal with the money you’re keeping in your employer-sponsored retirement plan:
- Keep your money where it is (this is what happens by default).
- Move it to your new employer’s retirement plan.
- Roll it over to an IRA.
Of course, you can simply take the money out to do what you want with it but this is obviously a very bad idea.
The best move you can make? I agree with the advisers here who say that you should move your money into a rollover IRA as soon as you can. This way, you will have full control and access to your money without issues. It’s a hassle to do the paperwork perhaps, but it’s much more convenient when you’ve got full freedom to deal with your retirement money however you’d like. I’d like this post to be a reminder for all of us with stray 401Ks to do that rollover asap. Now all I have to do is practice what I preach.
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{ 9 comments… read them below or add one }
Is anybody upset by the income limitations of around $100,000 for one to be able to contribute to an IRA? It seems ludicrous that a 29 year old right out of business school is denied saving in an IRA just because s/he makes $120,000 a year.
Yes, there’s the 401K, but $16,500 cap a year also seems so low. Is there any wonder why US savings is so low?
Someone help me understand. Thnx.
Well, there really are no actual limitations per se. You can still contribute to an IRA for a tax deferral; your money is just not tax deductible. In my life, I have NEVER qualified for a tax deductible IRA (maybe except the last few years, when my income sank like a stone 😉 ).
Also, there are caps to these things due to the whole tax code. I guess if there were no caps, we’d be “ripping the government off”, I would presume? We can all still save for retirement through non-tax advantaged accounts…. the retirement plans and programs and accounts we have via 401Ks, 403Bs and IRAs are around to motivate us to save. But not being able to qualify shouldn’t discourage us from saving anyway.
I’ve come to accept the rules — I realize our government will only give us the breaks they can “afford” to give us.
Samauri, the reason there are limits is because the goverment is not willing to reduce taxable income revenue any lower. Even though you would pay taxes later, there is never any guarantee of that. For example (not meaning to be morbid here), but lets say you have $500,000 in your IRA and you get hit by a car and die in 2011. There is no estate tax in 2011, so no matter how much you have in your accounts and holdings, the government does not get one dime. They have effectively missed their opportunity to tax any of that income.
Its not going to get any better either. The government cannot spend money like it has been and also do things like lower taxes and increase IRA/401K limits – its just not going to happen. In fact taxes will probably go up. I think the best thing to do if you can qualify for a ROTH IRA is to put as much as you can in there. Then when you take it out, it is tax free. Again, there are income limits and all that jazz, but looking at the future, I am hedging my bets that taxes are going up and I want to be in a ROTH if possible.
I don’t have a 401K program through work and was stuck by myself in figuring out getting started with a retirement account. After everyone has praises the Roth, I have started a Roth IRA and have contributed each month.
Great risk reduction tip given current economic conditions. I also like to have investments under the close watch of my financial advisor to do a periodic review. This is just easier for me when investments are consolidated and not spread out with different companies or financial institutions.
Thanks for a great article. Moving it to an IRA when laid off makes sense.
Hi SVB – Thanks for your thoughts! I never thought about it as “ripping off the government.” Instead, I feel the government is ripping us off every year with what we are getting in return for all the taxes we are paying! The government is a genius for withholding income from us every pay check.
The government can’t afford anything right now, we’re broke! 🙂
Hi BasicMoneyTips – Good example on the dying in the car thingy! Got to love the estate tax. We need to abolish the state tax. I don’t get how you can pay taxes all your life, and then when you die, and $ above a certain limit is taxed again?! No wonder why rich folks like Buffet, or anybody with more than they have before death try and give everything away.
Paying less taxes will be a Top 3 goal of mine come retirement. Nevada or Washington, here I come!
Best,
Financial Samurai
>basicmoneytips
I think you are spot on. Taxes are going to have to go up. We have been running a deficit for a long time now. Most of my financial decisions are based on that. For instance I am not doing 1031 exchanges on properties under the assumption I would rather be taxed now at a lower rate than taxed later at a higher rate.
So long as taxes go up for all, and we all share the burden as an equal percentage of our income, it’s all good EscapeSomewhere.