Thursday, January 20, 2011

Rollover an Old 401k To Trade Stocks

Over the past few weeks I've been doing a lot of financial planning. If you've been following along with my blog posts you know that we now have our 401ks rebalanced, contributions bumped up to 15% and established new Roth IRAs. The only thing we have left hanging out there is an old 401k from my wife's prior employer. If you have an old 401k sitting out there also, or even if you don't, read on because you might find yourself in this situation one day and will hopefully end up better informed on what to do when the time comes. Bear with me on this, as it may be a bit lengthy of a post, but it is one of the best things I've ever done when it comes to stock market trading.

Generally speaking, you have 3 main options with an old 401k. You can leave it where it is, transfer it over to your 401k with your new employer or transfer the account into a Rollover 401k with another firm.

If the 401k company allows for it, you can leave your money where it is and do nothing if you leave an existing job. Many times if the account is under a certain amount, they may require that you move the account out. Don't be tempted to cash out the account, you will have to pay taxes, penalties and fees, not to mention losing any future long term growth and interest. Also, if you do keep your account there, make sure that you won't be charged any inactivity or low balance type fees due to not having any more regularly recurring contributions. I'd say this is an ok option if you won't incur any new fees, are satisfied with your current fund choices and rate of return and/or are in a transition to a new job and want to weight your options before making a decision. Additionally you may not have a 401k available in your new position, might be between jobs, or whatever the case may be. Just don't forget the account is there and keep track of it every so often to make sure all is well.

The second option would be to transfer the old 401k over to the new 401k, assuming you are transitioning over to a new position with a company that also offers a 401k. This is a good choice if you have a better selection of funds to choose from in your new account vs the old one. Additionally, if the fund choices have better long term rates of return, lower fees and wider variety, transferring the funds over to the new account would provide better opportunity for future growth.

The 3rd option is one that you might not be aware of. You can transfer your old 401k account over to a discount broker like Options House and open a Rollover 401k. With a Rollover 401k, you would first open the new account with the location of your choice and then call the 800 number of your old 401k and tell them that you want to do a '401k Rollover' to your new location. In that way you would not have to report the transaction on your taxes to the IRS and you would not incur any fees or penalties since it's just a transfer of accounts. Almost all of the Brokers will also reimburse you for any fees related to transferring an account up to $150, so there are usually no downside to moving your account where you want it to go.

The exciting part is that you would then be able to buy and sell stocks, bonds, mutual funds, options, futures, etc. You would no longer be limited to choosing from a small list of specific mutual funds that the 401k companies typically offer. For me that has been a great way to trade.

In a regular cash investment account, you normally have to keep track of all your buys and sells over the course of a year and have to record everything that you've sold and your gains or losses in a separate form on your tax return. If you actively trade, that could be pages and pages of transactions and quite a pain. For me, that took a lot of the fun out of things several years ago. With a Rollover 401k, that is not the case.

A Rollover 401k is handled the same way as a regular 401k. You are taxed on the money at whatever your current income tax rate is when you start to take withdrawals at retirement age. You are not taxed on individual gains and losses when you buy/sell stocks now. In other words, you don't have to keep track of anything throughout the year and come tax time you have nothing to record on your taxes. You still have to pay the commission fee to buy and sell stocks, but that just comes out of the same account and you have no administrative paperwork to deal with.

Of course before trading any $ of your own, I would highly recommend you try free Virtual Trading for a few months first. Most places allow you free Virtual Trading on their actual website you would use if you signup for an account, a good way to get familiar with a particular company and try things out first.

If you have any questions at all on how to get started or anything specifically related to trading, let me know. I usually trade a combination of options and stocks. If you're looking for a place to rollover your old 401k, I recommend opening a rollover 401k/IRA with Options House.  Stock trades are only $3.95 and they have a current promotion offering 100 free trades and they will cover any transfer fees up to $125 as shown below.  Find out further details here or click the image below. 

Open an IRA @ OptionsHouse Today.

Do you actively trade stocks or options? Do you have any good investment shows/websites that you enjoy? Please share some here, as I'm always looking to add to my trading knowledge!


Jen said...

David has 2 old 401k's from previous employers that we keep meaning to do something with. What would you recommend for us that want to just make it easier to keep track (or just have 1) and not worry about checking the trading and all. Roll to current employer i'm guessing?

Chris said...

If you do not want to actively trade stocks with it and he has a 401k at his current job, yes, I'd say to roll them both to the his current 401k. Before you do, make sure that for his current 401k that you are investing in the funds that you want to be investing in and in the percentages that you want, because when you transfer in the money from the old accounts, it will automatically go toward whatever funds and in whatever percentages you're doing now. Assuming you're already set there, you would call up his current 401k company to see what you have to do to do a direct 401k rollover from the two old accounts to his new one. Usually you have to submit a form with your old account number, name of the place and rough amount in there, sign it and then mail/fax it to them and they take it from there.

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