The 401(k) Rollover Misstep That Could Cost You
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Access to affordable credit helps me pay my employees, but I don't really need it. Inflation is killing me. But who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill. See? Banks and credit unions help small businesses make payroll. This bill would cut the vital resources they need. While increasing megastore profits. They deserve it, don't they? Tell Congress, stop the Durbin Marshall money grab for corporate megastores. Paid for by the Electronic Payments Coalition.
Here's your Money Briefing for Tuesday, July 30th. I'm J.R. Whelan for The Wall Street Journal. When they change jobs, many people choose to roll over their 401k retirement savings into an individual retirement account or IRA. But then they don't follow through.
A lot of people, especially those who are younger, who have benefited from automatic enrollment and 401k plans, they assume that IRAs work the same and that they might realize, OK, I have to transfer that money. But once it's in the account, it will be automatically invested for me. And it's not. It's going to stay in cash.
And that means they can miss out on significant growth. Wall Street Journal retirement reporter Ann Tergesen will talk about how to make sure your retirement savings don't miss a beat. After the break.
Access to affordable credit helps me pay my employees, but I don't really need it. Infliction is killing me. But who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill. See? Banks and credit unions help small businesses make payroll. This bill would cut the vital resources they need. While increasing megastore profits. They deserve it, don't they? Tell Congress, stop the Durbin Marshall money grab for corporate megastores. Paid for by the Electronic Payments Coalition.
A critical mistake people often make when rolling over their retirement savings can cost them substantial gains. Wall Street Journal personal finance reporter Ann Tergesen joins me. Ann, bring us up to speed for a moment. What options do people have with their retirement account when they leave a company?
You basically have three options. The first one is just to leave the money at the company and, you know, not to get too in the weeds, but if you have a very small account, that may not be possible.
What common rollover mistake causes 401(k) funds to sit in cash instead of being invested?
But generally, if your account is worth more than $7,000 of your balances, you will have the option to leave that money with your former employer. You should check with your former employer on that, but that usually is an option. And it can be a very attractive one if you're in one of these like mega 401k plans that has ultra low fees, that can be a great option for you. The second option is to roll the money over to your new employer's 401k plan. So basically by rolling it over, what I mean is you transfer it without any tax consequences. And the third option is to roll it over to an IRA.
Does people's money automatically go with them when they change jobs?
No, no. You have to do something. If you don't do anything, it's going to stay with your former employer. Again, if it's a pretty small balance, if it's less than $7,000, the employer has the option to roll that out for you into an IRA. So it's sort of an involuntary IRA rollover. So that can happen if it's a small account. But basically, if your balance is above $7,000 and you do nothing, your account's just going to stay at your former employer's 401k plan.
If people do want to roll over their savings to the new job location, what steps should they take?
The rollover process can really vary depending on which company has your IRA and which company has your 401k. The basic steps are that you need to – if you don't have an IRA already, you need to open one. So you need to call up whatever company that you want to house your IRA and you need to open up one of those accounts.
And that could be a company like Fidelity or something like that?
Yeah, Fidelity, Schwab, Vanguard, those are some of the bigger ones. And then you need to contact your 401k provider and you need to say that you want to do a rollover and they will walk you through the steps that are involved.
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