401K Rollover

Finance Comments

Everytime you get a new job and join another company, there’s always this question of “What do I do with my 401(K)”? Having been through this process recently, this blog post is my summary.

While your Roth 401(K) moves to a Roth IRA, you’ve 2 options for your pre-tax 401(K) -

  1. Rollover to an IRA account.
  2. Rollover to your new employers 401(K).

Before we look at the advantages and disadvantages of the above 2 options, another thing to consider is the financial institution. My old employers 401(K) is in Fidelity and my new employers 401(K) is in Vanguard. Based on my experience, the index funds at Vanguard have a smaller expense ratio when compared to their counterparts in Fidelity. As a reason, I ended up moving all my 401(K) money from Fidelity to Vanguard. This was the process -

  1. Call Vanguard and let them know that you’ll be rolling over a 401(K) from Fidelity.
  2. Fill an online form at Vanguard indicating what you want to do with the money - I’d recommend transferring all of it to a low-yield bond so that you can dollar cost average it to the index funds over time.
  3. Call Fidelity and let them know that you want to move all your money to Vanguard.
  4. As Fidelity wasn’t willing to mail the check directly to Vanguard, you’ll have to mail the check yourself to Vanguard.

Now, back to the 2 options -

Advantages of Option 2 (Rollover to new 401(K)) over Option 1 (Traditional IRA)

  1. Lower Expense Ratio - The funds in a 401(K) usually have a lower expense ratio. For example, the S&P 500 fund (VFINX) has an expense ratio of 0.16% while the corresponding institutional shares in the 401(K) have an expense ratio of 0.02%.

  2. The Loan factor - You can take a loan on the amount in your 401(K). So, more the money in your 401(K), the larger the loan you’re eligible for.

  3. Easy to manage - It’s a lot easier to maintain one account.

Advantages of Option 1 over Option 2

  1. More choices to invest - In a traditional IRA, you can invest in whatever stock, ETF or index fund that you want whereas in a 401(K), you’re restricted by the index funds chosen by your employer.

Kaushik Rangadurai

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