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Rolling Over Your 401(k)

Now that I have settled into my new job, I have to deal with the financial side of leaving a job.  It is something that many people put off, but when you get a new job it is important to make sure your retirement accounts are in order.

In my old job, I was putting money into several investment and retirement sources.  I put 3% of my paycheck, matched 100% by my employer, into a traditional 401(k) retirement plan.  I put another 3% into a Roth designated 401(k).  I put another 3% into company stock at a 15% discount.  My company also contributed to a pension plan on my behalf.  Needless to say, there was a lot to deal with.  Fortunately, if you know what you are doing it is easy and painless.

401(k) Rollover

A 401(k) is a tax deferred retirement plan.  That means you do not pay taxes on any contributions.  Instead, you can put the money into your account, almost always matched by an employer, pre-tax.  However, your withdrawals are taxed.

Because of the special tax status, it is best to do a “rollover” rather than take a disbursement on your funds.  Most employer sponsored 401(k) plans charge a management fee in addition to mutual fund investment fees.  My fees were high, so I decided to do a 401(k) rollover right away.

To start, I opened a new Rollover IRA account at my brokerage firm.  It was a quick and easy online process.  In about five minutes, I had a new account.  When choosing a Rollover provider, look into any possible fees and investment options.  My IRA has no fees and allows me to invest in any stock, bond, fund, or investment vehicle I could reach with a Schwab investment account.  The only cost is $8.95 per trade.

I got on the phone with a Schwab retirement account customer service representative and he took care of all of the dirty work for me.  My old 401(k) provider, ING, is mailing me a check with my new Schwab account number on it.  I can drop it off at any Schwab office or mail it in to have my balance transferred to my new account.

Roth Designated Funds

A Roth IRA is a relatively new investment option.  If you have more than seven or eight years to retirement, this is an incredible opportunity for investing for retirement.  A Roth account requires after tax investments, but all withdrawals during retirement or for certain qualified events are 100% tax free.

I went through the same process as the 401(k) rollover for my Roth.  I set up the new account online, the same Schwab employee had the ING account closure and check mailing arranged.  When the check shows up this week, I just have to drop it off.  No fees other than trades.

I opened up my Roth account so I can contribute to it any time in the future.  I plan to have a direct deposit of 3% of my pay go into that account going forward.

Pension

I had the rare benefit of a pension fund at my old employer.  Pension funds, or “defined benefit” retirement plans, are 100% employer paid retirement accounts.  These are quickly disappearing, and unless you work for a giant, old company, chances are you will never see a pension.

Based on my balance and age, I was required to take a distribution.  I had the option to take the cash, paying both income taxes and a 10% penalty or roll the balance into an IRA.  I picked the IRA.  I had to fill out a few forms and mail them in.  I will receive a check from the Qwest Pension Service Center designated to be deposited into my IRA account at Schwab.

Company Stock

At one point, I had accumulated over 1,000 shares of Qwest stock.  With a 15% discount and a positive outlook, there was no reason to skip out on the plan.  When my investment account became so heavily weighted to one company, I knew it was time to re-allocate.

I have been slowly selling down my stake in roughly $1,000 increments and investing the proceeds in other stocks and ETFs.  I made a dollar cost average of 125% profit on my Qwest shares, so I have no hard feelings about being so heavily weighted into one company.  However, diversification is important in a portfolio and it was time to move things around.

Summary: Don’t Forget Anything, Don’t Pay Extra Taxes

Moving retirement funds around is not hard, but it is important to read the fine print and make sure you don’t pay extra taxes or fees.  Make sure your dispersed funds are designated for a retirement account to avoid IRS penalties.  Also, don’t forget anything.  Make sure you take 100% of your funds with you.  Losing hard earned money would be a bummer.

In the future, I plan to invest my retirement funds in a diversified portfolio primarily consisting of destination, or target date, mutual funds.

If you think I missed anything important, please share in the comments.

Sharing the whole story would take more words than I can fit into this post, so I have been sharing my experience in a series on career transitions.  To make sure you don’t miss these posts, which are sure to help you navigate the path to a new career and navigate the process of leaving a job gracefully, be sure to sign up for e-mail updates.

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