The Benefits of Rolling Over a 401(k) or 403(b) to Betterment
Whether you have a single old plan or several accounts with previous employers, there may be reasons to consider rolling them over to Betterment.
When you switch jobs, your old employer-sponsored retirement plan (401(k), 403(b), etc.) still belongs to you, but it becomes inactive and you can’t continue to make contributions. So what should you do with it? Whether you have a single plan or several, there are some good reasons to consider transferring your old 401(k) or 403(b).
Betterment makes it simple to roll over your old employer-sponsored retirement plan into an IRA – or a Betterment 401(k) if you have one through your current employer. Either way, we invest your money in a low-cost, globally diversified portfolio, and we offer personalized advice while acting in your best interest.
How can you know if that’s the right move for you? Let’s talk about it.
In this guide, we’ll:
- Explain your options when dealing with an old 401(k) or 403(b).
- Walk through key questions you should ask when making your decision.
- Talk about the potential benefits that can come with rolling over your old account to Betterment.
- Show you how to get started.
What can you do with your old 401(k) or 403(b)?
Employer-sponsored accounts can be a great way to save for retirement. They have valuable tax advantages and come with higher contribution limits than an IRA. But after you leave a job, it’s important to consider what you do next with your plan.
You have a few options:
- Keep it where it is.
- Roll it over to your current or future employer’s plan.
- Roll it over to an IRA.
- Take a cash distribution to your personal checking account.
Keeping your 401(k) or 403(b) where it is or moving it to your new plan may result in high fees, confusing investment selections, a lack of financial planning options, or a portfolio not appropriate for your goals. And taking a cash distribution to yourself is a taxable event that can cause the IRS to hit you with early distribution fees.
None of those situations are ideal.
By contrast, rolling over your 401(k) or 403(b) into an IRA could give you more control over your investment options, which could lead to lower fees, and can allow you to organize your funds from most previous employer-sponsored plans by combining them in one place.
At Betterment, your IRA can be invested in any one of our diversified, expert-built portfolios and personalized to your own appetite for risk.
What should you consider when exploring your options?
Before rolling over your 401(k) or 403(b) into an IRA, you should know exactly what will happen to your money, what your options are, and how it could impact your future retirement goals. Everyone’s situation is a little different. So, how do you know if you should switch? While not exhaustive, here are some factors to consider when you’re making this decision.
Start by asking your old plan provider about fees and investment options so you can make an informed comparison. Operationally, we don’t charge for rollovers on our end, but your old 401(k) or 403(b) plan provider may charge you for closing your account with them.
Next, consider taxes. When rolling over a 401(k), 403(b), or any other-employer sponsored plan to an IRA,, we use the direct rollover method designed to prevent any withholding or negative tax consequences. But there are two important things to remember:
- Be sure to designate a distribution from your current provider as a rollover.
- If you have a traditional 401(k) or 403(b), you typically want to roll it over into a traditional IRA. If you have a Roth 401(k) or 403(b), you must roll it over into a Roth IRA.
If you withdraw from a traditional 401(k) or 403(b) as a “non-rollover” before age 59 ½, you’ll face a 10% penalty for an early withdrawal. If you roll over from a traditional plan into a Roth IRA, you’ll have to pay income taxes on the money. These situations are unnecessary for investors in most circumstances.
Other questions to consider include the following:
- What investments are currently available and how do they compare to your other options?
- What are your current fees and how do they compare to your other options?
- Will you need protections from creditors or legal judgments?
- Are there required minimum distributions associated with certain accounts?
- How does your employer plan treat employer stock?
- Could the rollover impact your Roth conversion strategy?
When deciding whether to roll over a retirement account, you should carefully consider your unique situation and preferences. Research the details of your current account, and consult tax professionals and other financial advisors with any questions.
What are some potential benefits of rolling over to Betterment?
At Betterment, rollovers are simple, automated, and personalized. In just a short time, you can open up a Betterment IRA, receive and review personalized portfolio recommendations, and generate rollover instructions entirely online. If you’re transferring more than $20,000, you’ll have complimentary access to our Licensed Concierge team.
Here’s why you should consider rolling over your 401(k) or 403(b) into an IRA with Betterment.
Access to different investment options
IRAs can include more investment options than a 401(k) or 403(b) plan. With employer retirement plans, administrators typically only give you a few options to choose from and limited to no guidance on which options may be best for you. You might end up in a portfolio that’s not appropriate for your retirement goals, or you might have to choose from limited high-cost mutual funds.
An IRA held at a brokerage or investment advisor—like Betterment—can provide you with access to a broader universe of investment options. Some investment advisors and brokerages that provide self-directed IRAs may offer access to an entire universe of investments such as single stocks, mutual funds, ETFs, and alternative investments.
At Betterment, we only offer investment portfolios consisting entirely of ETFs in our IRAs due to the benefits we believe they provide. However, we understand investors have personal preferences and different appetites for risk so we offer a suite of ETF portfolio strategies that allow investors to personalize investments to better align with their values and/or risk tolerance.
Compare your investment fees
IRA fees may be lower than those your plan administrator charges. You should compare the expense ratios (fees) between your 401(k) and our investments in an IRA. And depending on your plan, keeping funds within your 401(k) plan after leaving your employer may subject you to additional management fees.
At Betterment, we charge one fee for managing your IRA funds—our management fee. Betterment’s IRA management is available for 0.25% (25 bps) per year or $4 per month for those in our Digital plan, or 0.40% (40 bps) per year for those in our Premium plan.
The ETFs you invest in through Betterment charge a fee themselves, but we pride ourselves in picking low cost and tax efficient funds, with the goal being to maximize your take home returns. You can explore an overview of the fund fees in each of our strategies here.
If you have an existing IRA at Betterment, you can log into your account and view the “Holdings” tab to see a breakdown of the fund fees for your Betterment portfolio so that you can easily compare them with the options at your current provider.
Manage your portfolio in one place
Many investors appreciate the peace of mind that comes with having all their investments in one place. Understanding a fuller picture of your savings can help you make better estimates about your future budget.
It can also help you to manage your overall risk and portfolio diversification more effectively to keep you on track for long-term success. Depending on your situation, moving your retirement assets to one provider may also improve the tax-efficiency of your taxable investments.
Access personalized advice
Betterment offers personalized retirement planning advice and projections via our in-app tooling. For those looking for assistance on topics not covered by our automated guidance, our team of Certified Financial Planners™ is available via our Advice Packages and Premium plan to provide more in-depth financial planning.
How do you start a rollover?
When you’re ready to roll over an account, it’s easy to get started. Sign up for Betterment and log into your account, click on “Transfer or rollover” at the top right-hand side of your home screen, then answer a few simple questions. We need to know about your 401(k) or 403(b) provider, the type of funds held in your account, and their estimated values.
We’ll email you a full set of personalized instructions, including any information we need to complete the transfer. This will include your unique Betterment IRA account number, how your provider should make your rollover check payable, and where the rollover check should be mailed. Some providers mail the check directly to Betterment, others will mail the checks to you and request that you forward them to Betterment. Regardless, as long as you follow our instructions it’ll be considered a direct rollover without penalties or taxes.
Some providers may also require you to fill out their rollover paperwork, or they may ask you to give them a call. If so, there’s generally no way around it. But your email from Betterment should give you all the information they’ll ask you for.
Once the check arrives, we’ll automatically invest it and send you another email confirming your rollover has completed.
This process also applies to other employer-sponsored plans beyond 401(k)s and 403(b)s, including pensions, 401(a)s, 457(b)s, profit sharing plans, stock plans, and Thrift Savings Plans (TSPs), if moving those investments is the right choice for your unique financial situation.