After you get fired, it’s going to be tempting just to kick back and relax for a while. The 9 to 5 weighs on your soul and after being terminated, your brain probably needs to unwind. It’s healthy to unwind a bit. But after a week or two of relaxation, travel, Netflix binging, or whatever else floats your boat, it’s time to think about what to do with the money in your 401k. A rollover is likely the best option IMHO. (I hope you contributed to a 401k because if you didn’t, you’re probably missing out on free money but that’s another article.)
Now, I’m not a licensed financial adviser. Much to the contrary, I’m just a guy that has taken a deep interest in money and investing since the late 90’s but everything I’ve read would convey that with very few urgent exceptions, you should NOT take a withdrawal for personal use. Why? You’re going to have to pay an early withdrawal fee. Also, you’re going to have to pay income tax on this money. If you do this you’re going to see a significant portion of these funds disappear.
So what are your options? Here are the two most common.
Option 1:Do nothing. Leave it in your Employers Retirement Plan.
This might not be the worst option. At least you shouldn’t get hit with an early withdrawal fee or have to pay income tax. But that being said, there are reasons you may want to get that money out of your company’s retirement plan with the quickness. Your employer’s plan literally may be pick-pocketing you.
Your employer’s plan might not have great investment options.
A good traditional discount broker like Vanguard, Fidelity, or Schwab is likely to have a rich offering of investments to choose from. And if you don’t want to manage your investment these days there’s great advisor managed “robo-advisors” like Betterment, Wealthfront, or the quite interesting FREE automated investment advisor, M1 Finance
I may need to do a review of this free advisor. *Update: I signed up for an M1 Account.
Your Employer’s Plan Might Have High Expense Ratios in Their Funds.
In my humble opinion this is predatory and ought to be illegal. Nuff said.
Your Employer’s Plan May be Pick-pocketing You.
My employers plan administered by Empower, actually charges your around $7 per quarter. Why? They say for “administrative costs”. I’ve read somewhere that this is where companies get some of the money to do the match. There are many brokers that won’t charge you $30 a year just to be a customer. If your plan does this, get the money out. But how?
Option 2: Roll it Over to a Better Home
If you’ve determined that you want to keep your money away from fees and administrative cost, consolidate multiple accounts, or just have more options, most likely rolling it over is a good choice. So how?
The first step is going to be to establish the new account to roll it over to. You can do your own research but being the investing enthusiast I am, I’ve found the best choices to be amongst the following:
- Vanguard, Schwab, or Fidelity. Why? Ultra low-cost index fund and ETF’s. No commissions on buying and selling Vanguard funds and ETF’s.
- Betterment, Wealthfront, or M1 Finance. Why? Investments managed at a fair price by intelligent algorithms, to maintain your desired risk level. This is great for when you want to automate your investment management. I have an affiliate partnership with M1 Finance, so if you’re interested in signing up just click the graphic below.
Once you’ve established your account, you’re going to want to talk to your old plan and go through their (sometimes painful) process to start the rollover. Often your new broker can assist with this as they are happy to help you move the money into their custodianship and will take this as an opportunity to be of service and show your their customer service. In my experience, Vanguard does well with this.
It’s actually kind of a funny feeling. It’s a bit like calling your ex girlfriend with your prettier new girlfriend on the phone and telling her that you need to come pick up your things. Sorry old retirement plan…I’m moving on.
Disclosure: I have an affiliate partnership with M1 Finance and may earn a commission on new signups over a certain threshold.
OFFICE ESCAPE PLAN!
Subscribe to the Getting Canned FREE newsletter and get the Office Escape Plan. A guide with tips on how to freelance and earn outside of the office. Plan your escape now.