Ask Terry Questions Convert 401k to IRA

Convert 401k to IRA

By Terry Savage on April 03, 2014 | Financial Planning / Retirement

I wanted to take a portion of my 401k (from past job) and transfer to an IRA. I learned that since I’m not a current employee, I’m not allowed to take out just a portion of my money. Either all of it or nothing. My 401k has been doing well an average of 15% every year for the past few years. My question is …do all financial institutions offer roughly equal Traditional IRA options ? How do I check on the reliability of one place over another? Is an Ira the best option for me if I need to tap into my money from time to time? I have about 20 years until retirement. Thank you.

Terry Says:  This is an interesting question.  I typically advise people who leave a company to do a DIRECT ROLLOVER from their 40l(k) plan into an IRA.  That IRA account could be at a mutual fund company, such as Fidelity, Vanguard, or T. Rowe Price.  Or it could be into a brokerage firm or managed by a financial advisor.  (I always prefer the first choice — a well managed, low-cost mutual fund.)

You say you have 20 years until retirement.  Don’t plan to touch a penny until you are retired! That means you have a long time horizon, which is why a diversified, mostly stock portfolio would be the best way to invest.  I would recommend, for example the T. Rowe Price Equity-Income fund (I’ve been in that for 25 years!), or perhaps an equity income fund from Vanguard or Fidelity.  If you have them do the rollover, they will give you personalized investment advice on how to divide up your money into the IRA rollover account in their funds.

Now, what gives me pause is that you say you’ve earned 15% a year for the past few years.  Yes, the market is at an all-time high, and it has more than doubled in the past 6 years, so that is definitely possible.  I don’t know what funds you are invested in in your current 40l(k) plan.  Probably similar funds are available to you in an IRA rollover account at the places mentioned above.

But you should contact the fund companies I mentioned, discuss the rollover — and get their investment advice BEFORE you transfer the money!  That is, tell them about your time horizon and see which funds they would recommend.  When you’re comfortable, have them handle the rollover (don’t take a check or it becomes taxable) and divide the money into the recommended funds.  Talk with them yearly, stick to your plan, and you should come out way ahead in 20 years.

And if you need “extra money from time to time” get a part time job!  This is money you won’t touch for years!

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