How to do a rollover

You worked so hard to accumulate all that money in your 401k plan. And a huge bull market helped. But when you retire or move to a new job, you might be much better off doing an IRA rollover.

The best reason to do a rollover is that the investment choices in 401(k) plans — as well as 403(b) and 457 plans — are mostly designed for younger people, who will continue to buy shares through their payroll deductions, even throughout a bear market. Eventually, they will be rewarded for their discipline — because “eventually,” the market moves higher.

But now that you’re retired, you might want to ask yourself how long your “eventually” is. Can you ride out the average three-year length of a bear market, or even longer? Will you be required to sell at a bad time to take required distributions?

And, most importantly, does your company plan have a wide variety of more conservative investment choices, such as equity income funds or dividend yield funds?

Most company retirement plans offer either a money-market option or perhaps a stable value fund, which is a fixed-rate insurance contract. But their other choices typically revolve around more aggressive growth funds.

Even the conservative target date funds in most plans have performed miserably in the first quarter of 2022 because the nearest-dated funds are loaded with bonds. As a result of rising rates, bonds performed worse than stocks so far this year.

Handling your rollover can be a painless process with plenty of help available. But you need to know what you’re doing so you don’t fall into some expensive traps.

1. Never take the money yourself. Don’t let your plan custodian send you a check. You’re going to do a “direct rollover” to a new custodian — or an IRA offered by the same company that manages your company plan — assuming it is a low-cost provider like Fidelity or Vanguard. If you take a check instead of doing a direct rollover, the provider may withhold 20% in taxes, which you can’t get back.

2. Understand that your current plan investments will be sold and turned into cash — and then transferred to your new IRA rollover account. ( One exception: If you have company stock, get individualized tax advice around holding the shares for capital gains tax treatment.) Don’t worry about taxes when your company investments are turned into cash. There’s no tax impact on sale since eventually when you take money out, it will all be taxed as ordinary income. So this is a perfect time to create a new starting point to value your investment dollars.

3. Choose a new“custodian” for your IRA rollover account. I recommend a neutral place like Fidelity, Vanguard, T. Rowe Price or Schwab. You can make investment decisions or they offer low-cost investment advice for rollovers. Contact any of them on their toll-free numbers and ask for an IRA rollover specialist.

You’ll need to have your account information in front of you, along with other details that can be found on your latest statement.

4. Manage the process. The rollover process could take as long as 10 days until the money is transferred to your new account. But you can ask for your current retirement account to be liquidated immediately — eliminating risk of being in the market and unable to act.

5. Don’t be in a hurry to make investment decisions. Simply tell your new IRA custodian to put all the money in their money market fund for the time being. It’s not wrong to leave a portion in cash, especially in these tumultuous days. Then look into more conservative stock funds, such as equity income funds. You still need exposure to the stock market to offset inflation over the long run.

But you don’t have to jump in all at once.

You can give instructions to immediately move 25% into the equity income fund — and then automatically transfer another 5% of your cash into this stock fund every month — until you only have 25% left in your money market fund.

Now is the time to take control of your old company retirement plan. You can easily do this yourself and avoid paying big fees and commissions. That’s the Savage Truth.

Terry Savage is a registered investment adviser and the author of four bestselling books, including “The Savage Truth on Money.” She responds to questions on her blog at TerrySavage.com.