Podcast: First Time Home Buyer
For this podcast I sat down with Walt Wollet, mortgage loan officer with Pacific Residential where we discussed his experience as a first time home buyer. Learn about the home buying process from the perspective of a mortgage lender and how handled the process and what things he might have changed to make it even better. You can connect with Walt Wollet on LinkedIn, Facebook.
You can connect with me on Facebook, Pinterest, Twitter, LinkedIn, YouTube and Instagram. About the author: The above Podcast “Podcast: First Time Home Buyer” was provided by Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. With over 10+ years experience, if you’re thinking of selling or buying, I would love to share my marketing knowledge and expertise.
I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Adams, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.
[00:00:09] Paul Sian: Hello, everybody. This is Paul Sian, Realtor with United Real Estate license in the state of Ohio and Kentucky. And with me today is a returning guest, Walt Wallet with 5th 3rd Bank. He was with a different lender in the past, and now he’s with 5th. 3rd. We’ll talk Are you doing today?
[00:00:24] Walt Wollet: I am fantastic today, Paul. We’re out here at the on my new piece of property that you helped me acquire and I’m excited. Toe do a podcast. It’s been a while.
[00:00:36] Paul Sian: Yeah, that’s that’s one of the reasons to that we decided to do this. Podcast is hey, your lender. I’m the You know, I’ve been through the process of myself of buying my own house as a real real estate agent, so I know how it is. So let’s we want to get the perspective of a mortgage lender, you know, buying the house. So I guess let’s just start from the very beginning. What’s what’s the first step that anybody has to do If they’re they’re interested in buying a house, they skip, you know, leave out the real estate agent. They know they want to buy a house, and they’re gonna talk to a lender at 5th, 3rd, and that happens to be you. So what’s their What’s their first step?
[00:01:10] Walt Wollet: So for my first step, and we talked a little bit before this about just being an active consumer, and we’ll get more into that. But it really it really what I what I would tell people is that you need to do an honest debt analysis, and you honestly need to look at budgeting eso. You need thio when you’re when you’re buying a place you need, you need to take in all what all those costs are, you know? So what are the costs that you know you have to pay every month, is there, You know, do you have a $40 credit card bill you pay every month? Your cars? You know, your auto loans, whatever, whatever you pay every month and you need you need to analyze that. Um, just just so that way you’re not wasting your time, right? So it’s like the first thing I would do is get is get pre qualified or talk to a lender, you know, And I’m an insider, so I kind of knew what I had to do and what I did was before I got pre qualified, was paid off, paid off all my credit cards because I could, um, you know, just to make sure that when my credit was pulled, I had I had a score that was higher so that I could get the best rate in terms that are available. Um, so that that was that was that was a big That was a big thing that I that I did your credit score a big part of it is is factored by credit utilization. So a lot of times, people that are borderline approval if they can get, get added to a secure card or get added to, you know, another account, unauthorized user account or pay down credit cards, Um, you know, say from 70% to below 50% utilization than their score could shoot up. And we can, you know, we can qualify them for, for for what they really want to buy. So that that that that would say that would be the first step is always to just talk to different lenders and talk to different people. Don’t go toe one lender and just trust them and like I wouldn’t want any what, buddy? That I work with to just talk to me. I want them to do their own research. And I want them to know that I’m going to take care of them now If they find someone else that maybe is promising them better numbers or whatever. You know, we I hope that we can talk about that. But, you know, at the end of the day, we have toe, we have to perform and do what’s best for consumers. Yeah,
[00:03:27] Paul Sian: definitely looking at that. Going back to the the credit score. And you mentioned credit score affects your your interest rate. And you know what? Let’s do you have Ah, breakdown. Basically, you know what? What credit scores and how how much impact on your interest rate is? I mean, is it is something easy to quantify? Or is it a little more, you know, computer oriented than that or computer algorithm oriented than that?
[00:03:53] Walt Wollet: So this is another. This is another question. Where it gets into every bank is gonna be different on that account. Okay, so you have the agencies Fannie and Freddie, right? That that back these the back these loans and securitized these loans. And they said, Ah, lot of what the fees and charges are on on those you know on those products and and those were built in to the actual interest rate into the actual loan. In a lot of cases,
[00:04:21] Paul Sian: those almost like base fees,
[00:04:22] Walt Wollet: right? But then other people. So what a lot of banks will do and Chase Chase is an example is notorious for this, but so say they don’t want They don’t want a certain loan. They still legally have to offer it. But they’ll raise the interest rate on that product so that they don’t have to, you know, originate or services many of those loans. So, you know, truthfully, you know certain certain companies will do that with government loans if they don’t want, You know, they don’t want to deal with the potential risk of having the the agency’s forced them to buy back those loans if there’s any sort of auditing or documentation issues, so they just set their their margins, you know, like this that their rate really high, um, to try to dissuade people from applying and you’re seeing that a lot with refinances that some of the larger lenders now, too, Just for the same. The same exact reason.
[00:05:17] Paul Sian: So what do you tell us about some of the hiccups that you had happened to you in your specific alone while you were trying to buy a house?
[00:05:25] Walt Wollet: So I would say that I would say that any hiccups we had Mike, who helped helped who helped us out on this purchase, did a did a great job with, you know, a soon as stuff came out of underwriting. Soon as underwriting came back with a message, he would reach out to me and anything we needed, we would get. We did a good job together. Me being an insider, of documenting everything up front that we needed Thio. So any letters of explanation and any sort of thing like that, I’d say that the biggest hiccup was probably and especially right now with Kobe, it was the appraiser. So you way had required a desktop appraisal on this purchase, which is essentially a drive by appraisal. Now, typically, you know, in any other market, a normal market. I guess you might say you would have that appraiser reach out. They would be reaching out to the selling agent so the agent would know. Okay. The appraiser has seen the property. They’re out here
[00:06:25] Paul Sian: there physically walked in the property, right? And almost like a home inspection,
[00:06:28] Walt Wollet: right? And so that didn’t happen with this purchase, I guess. I think he pulled. He might have pulled into the back, you know, a little bit and checked out some of the buildings and took off, right. Um and then and then the appraisal came back. Luckily, was all good, but I think one of the hiccups was just that. That that cellar not knowing that the that the appraisal was done and that the seller’s agent not knowing. And that kind of elevated there, um, anxiety, right?
[00:06:55] Paul Sian: E, remember talking with the seller’s agent, basically, you know? Hey, when’s the appraisal happening? And, you know, I asked, I did ask the agent. You know, did they praise will call you and that kind of send up red flag on her part unintentionally because, you know, they won’t be contacting her. They would just be driving by, you know, looking at the back of building or looking, walking the building that really get, you know, looking to get inside the building.
[00:07:20] Walt Wollet: But as far as just just hiccups now and generally on in this market with loans is ah, big thing I talked to with my team and my manager all the time is just getting things in is clean and as clear as possible, you know? So what I think a lot of especially first time clients don’t understand is you cannot tell me that your student loan payment is this when really, it’s this and you cannot You cannot say that you make this much money when really you make this much money and every little detail of that application is gonna be verified and is gonna be put through extreme due diligence. So with that said, you know, like where when where we run into problems or where any lender will run into problems is when the story changes, you know? So it Z okay, we’re calculating, you know, 40 hours a week for your income, and then we get you know, the verification of employment back. And it’s it’s 32 you know, a week. Um, even though your recent pay stub stay safe 40 like, you know, those kind of issues I think everyone runs into and deals with, and it’s just like we have to have it perfect, you know? So if we’re talking about homeowners insurance numbers up front and this is what they are, and this is what you know, this is what they need to be. Then that’s what it is, you know. So we can’t I guess we can’t have, you know, radical changes in process or else you’re gonna have a loan that goes on forever and ever.
[00:08:45] Paul Sian: Yeah. So make sure you, you know, you’re dot your I’s cross your T’s and making sure the information is 100% correct. I mean, probably one of the best ways to do that is, you know, go on your own, pull your own credit report. Make sure you see all your accounts. Kinda like you had mentioned the beginning. Take a look at all your debts and and your assets as well. You know, make sure all your income is properly documented. Make sure all that’s documented. You know, the numbers that you’re reporting are what you’re being, what it is being reported to the lender that way. It you know, it’s smoother process underwriting is gonna have less less questions and you know you’re the one will go through easier,
[00:09:20] Walt Wollet: definitely. And one thing that I advise a lot of people to is I like to have, if possible, if time permits have that credit conversation with the clients up front. So even, you know, two weeks before they’re ready to shop, you know, even months before ideally, we talk about the credit and that there was a There was a case recently with a friend of mine, a client who’s a doctor, and he had mentioned, though I you know, I have this collection from this utility and I don’t know where it came from. And you know, there’s there’s laws that debt collectors and that people have to follow. And a lot of times you know what we’re seeing in the world, right is with with corruption and people not following rules and people not doing what they need to dio Ah, lot of times you as a consumer and you do you have rights to dispute that and toe thio and try to clean up that information yourself. The, uh, credit bureaus have legally every year have to send you a copy of your credit report if you request it so and I always advise people to do that, definitely
[00:10:21] Paul Sian: take a look at it. It mentioned fees earlier. We talked about a little bit about lenders fees and let’s talk a little bit more. I mean, what? We have your base fees that the the these other, like government sponsored entities, so to speak, the Fannie Mae Freddie Mac’s that they have charged. What sort of extra fees are you know, Banks, tacking on the loan and whatever. I guess what? Some of the reasons for these fees
[00:10:45] Walt Wollet: so every every loan requires people that work on it. So one thing is, is that I always say is you know, I would advise consumers toe, look at different lenders and talk to different people Now, I’ll tell you right now that cheaper is definitely definitely, definitely not always better. And a lot of times there are lenders out there that you know they’re overpriced and they’re at the top of the market and they know it, um, and so I guess there’s a There’s a huge discrepancy between fees in various programs and various lenders, and it’s just a matter of going and asking those questions. Okay? What is you know, why is the processing fee this why, you know, what’s this underwriting fee? And then it’s always okay to ask. Well, hey, is there anything we can we can do about this? So in my case, when it comes toe the fees or the stuff that I that I had to pay for it. So you know, certain things that the bank paid for because I’m an employee, which is a great benefit to us. Um, you know, help me, Help me, you know, save money. As I bought this place, one thing that a lot of buyers don’t think about is all those incidental fees. So every home inspection is 4 to $500. You know, every, um, you know, just just buying garbage cans out here was $150 you know? So there’s these. There’s these costs that come up, you know, the wax seal on the toilet stuff will come up, and you just have to make sure that you have that budget it in and that you’re prepared for those expenses. And so, like we you know, a lot of times if there’s multiple people living in a house and it’s it’s one person on the loan, you know, like that’s when I’ll look at it and be like Okay, well, you know, really, there’s three people that are gonna be living in this house. Three people sharing expenses. It’s different. Um, but those kind of loans are are always more difficult, you know? So you really want to make sure that, um, you understand all the costs involved, Especially if you’re especially if your debt to income ratio is higher as it is because you have a lot more expenses. So,
[00:12:54] Paul Sian: yeah, we’re talking about those fees. I mean, it’s almost example is some of the car dealers used car dealers or even new car dealers? I mean, you know, the you get through the negotiation process you got, you got the price on the car, and then you go talk to the finance finance manager quote unquote. And that’s where they you know, they start trying to tack in all these, you know? Hey, let me let me throw this warranty on you. Let me throw, you know, non, you know, payment protection in case you’re disabled. Campaign and So that’s where they start packing in things, packing their basically fees. You know, they’re fattening the bottom line of the car dealer, of course. And you know, that’s that’s part of their job. But you know, the same time to as consumers, our job is to look at that critically and say, You know, do I really need that? You know, Do I need a no payment fee? You know, because I’m disabled. I’m not currently working, but at the same time to, you know, turn around, look at your auto insurance or look at your homeowners insurance. Are they providing some similar coverage that you know that you would need or you know would would avoid? And least in that case, in the autos auto example, It’s not so clear cut. You always don’t have that type of thing. You know you’re homeowners insurance. Not necessary gonna cover you. You know, if you can’t, you can’t pay the mortgage, but there might be other, some other benefit or some other protection. You know, your employer might be offering something for you too, you know. Why pay the extra fee to the lender. You know, when it’s saving you money and they’re just trying to pad their bottom line versus, you know, you’re trying to save your dollar and you know, it’s a long term purchase you’re investing for, you know, 2030 years. Mawr costs them or the higher the interest rate. I mean, the more you’re paying overtime,
[00:14:35] Walt Wollet: and that’s why it’s so. It’s so important up front. You have, You have power is a consumer, you know, like and lenders, you know, if if any lender doesn’t, you know, it doesn’t wanna be competitive. That za red flag, probably. You know, so especially with with us in the bigger banks, you know, we we have you know, we did until, you know, kind of some of the, you know, the new fee with Fannie and Freddie for refinances, um, kind of cut into our margins a little bit. But, you know, we’re willing, toe, do you know we’re willing to do whatever we can do toe win business, you know? But at the same time, we have to pay people off a fair wage and we employ Americans, you know, So that Z you know, that can can be a difference, right? But it’s just a matter of like weighing, weighing out things. You know different. You know this. This lender might have the best deal, but they might take a really long time to get it done. You know this lender there there really fast, But they’re very expensive, you know? And what’s the What’s the trade off? And so you know, it’s always good toe talk to multiple people about that to gain a broader understanding for yourself.
[00:15:46] Paul Sian: How are they giving those fees? I mean, I’m presuming you need to get a credit report. Run right, Okay. And then how how big of an impact is that? You know, you’re getting multiple credit reports. Let’s say I talkto 34 lenders and I say, Okay, go ahead, run my credit if I, if I do it over the same day or a couple of months, is a big difference.
[00:16:05] Walt Wollet: So as as Faras a assed faras, a hit on the credit report. Yes, it’s it’s 30 days, so you’re allowed. What sends a red flag to the to the bureau’s is when you shop for a bunch of different things. So say that when I was buying this house, I also have my credit pulled for a car and I had my credit pull it for a tractor on and I did all this financing stuff. Well, my credit score, which just start to tank because it’s because the way the agencies that their algorithms or reading that is this person doesn’t have any cash right there. They’re financing everything you know. Here’s another credit card inquiry, so it’s all within that 30 day window. So you legally you get your credit pulled once with a lender, and then you have 30 days and you could have the credit polled, so long as it’s a mortgage inquiry and not any sort of general finance inquiry. And it’s how they’re coded to the to the actual credit providers, right? But so long as it’s a mortgage inquiry, it only it’s only gonna count is one hard inquiry. So you you’re you’re the credit agencies. They don’t wanna dissuade people from shopping for mortgages because we need to have a fair, you know, a fair and ethical mortgage market. Um, and it and it iss you know it. It’s definitely better than at what I’ve heard about, you know, from from some of the people I work with in before 2000 and eight. Right? But, um,
[00:17:30] Paul Sian: but comparison comparison shopping is, uh, could be a big saver. I mean, you know, thousands upon thousands over the life of the loan. Definitely going back. Now, we’re going back to your own personal experience looking. You know, hindsight is 2020 looking back at the whole process. Is there something you think you could have done better? That you know, would be good advice for somebody else?
[00:17:51] Walt Wollet: Yeah, I think I am. I think I probably I probably should have paid off all my all my dead sooner, you know? So that was that was one thing is I really, um
[00:18:05] Paul Sian: when you say sooner, how much sooner? And say prior to applying the loan. How much quicker should you have done
[00:18:12] Walt Wollet: that? So just as an example, I had There’s a company. There’s a rental verification company, and I pay them a fee toe, add toe, add my rental trade lines to my credit report, and those were not added before my credit report was pulled. So just like things like that that I had done to strengthen my credit profile in my score, they weren’t reported, right. And then I paid off all my cards, like I said, but some of them were still reporting balances when we pulled s. So it was kind of like take
[00:18:45] Paul Sian: 30 to 60 days for some companies report.
[00:18:47] Walt Wollet: Exactly. And so And here’s what I found out is that you most companies will offer what’s called off cycle reporting so you can call them like, Hey, I’m you know, I’m gonna get my credit pulled for, you know, this investment property loan. And I just paid off this credit card. I’d like it to report. And so some of them were honest with me, and they’re like, Oh, well, yeah, we can report And they did, and others said they did, but they didn’t. And it’s just the nature of, you know, the nature of it. So I would I would say a lot of that stuff. I would I would just, you know, I would just get it done as soon as possible. If you know, you know, if you know that, that’s gonna happen. Like I had my I had my credit pull twice for this home purchase. Um, because the original credit report expired right. Um, and I did that in February, you know? So I knew in February like, Okay, that’s what my actual score is. And then I use that credit report to attack the, you know, some of the balances and anything. Any other derogatory is that we’re keeping my score lower than where where I wanted it to be. Okay, so
[00:19:50] Paul Sian: all great advice and all great conversation. So I appreciate you taking the time to be on this podcast with me. Any final thoughts?
[00:19:59] Walt Wollet: Um, I, uh I just I just say everyone stay safe out there. And, um, you know, it’s just like with with what we’re talking about with with lenders, you know, and with getting different opinions and different perspectives in the world right now, that is what I would advise everyone to dio, you know, So, ah, lot of people there usedto watching CNN. They’re used to watching Fox News. They get their perspectives in their opinions, you know, from this one place. And I think that, you know, especially right now, is as you know, things were kind of, you know, getting getting a little crazy
[00:20:38] Paul Sian: up in the air,
[00:20:39] Walt Wollet: right? We need we need to All kind of, like, you know, realize that that everyone’s a person and that, you know, people are people and that we just way have to We have to do a better job working together. We have to hold our leaders accountable in this country.
[00:20:55] Paul Sian: We’re in this together basically,
[00:20:56] Walt Wollet: right, you know, And then and then that’s that’s all I That’s that’s all I would say to people is just and especially if you’re working with mortgage lenders right now, we’re all you know. We’re all stressed out and we’re swamped. And, you know, your I promise you you’re not the only client you know. So it’s like, you know, just just be patient with people. Um, you know, there’s a lot of people that that, you know, behind the scenes that work on these loans and your your loan originator eyes going to do their best for you. But a lot of times things, things happen. Unfortunately, and you know, you just need to take it as a learning experience and move forward. And I think that’s what our country needs to do with, uh, a lot of this craziness right now
[00:21:38] Paul Sian: wholeheartedly agree in the awesome advice. Thanks again for being on
[00:21:42] Walt Wollet: awesome. Thank you, Paul.
How Much You Should Have In Your 401(k)
According to a retirement study released by Stanford University, only about 50% of American workers have access to a 401(k) or equivalent employer-sponsored retirement plan. And many who have a retirement account, arenât making sufficient contributions to meet their targeted retirement goals. Retirement savings is a life venture where the stronger you start â and […]
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How Should I Save If the Fed Cuts Rates?
It’s not all bad news for savers in a lower interest rate environment. Here’s why.*
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I Dropped Out of College: My Student Loan Repayment Options
No one intends to drop out of college. If you show up to campus for your freshman year, chances are you plan to graduate in four years and use your degree to land a job. Maybe you even have the…
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New developments continue to pour in each day surrounding the coronavirus pandemic. The COVID-19 outbreak has drastically changed nearly every aspect of life for millions of people, and the workforce in particular has been hit hard. Businesses, employees, and job seekers are all scrambling to identify what exactly ânormalâ will look like in the coming… Read More
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Is Now a Good Time to Buy a House?
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5 Options for Your Retirement Account When Leaving a Job
One of the most common retirement questions I receive is what to do with a retirement account when leaving a job. Knowing your options for managing a retirement plan with an old employer is essential because most people change jobs many times throughout their careers. And millions of Americans remain out of work during the pandemic.
When you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave.
Fortunately, when you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave. It doesn't matter if you quit, get fired, or get laid off, the same rules apply.
This post will cover five options for managing your retirement account when your employment ends. You'll learn the rules for handling a retirement plan at an old job and the best move to create a secure financial future.
Why should you use a retirement account?
Investing money using one or more retirement accounts is wise because they come with terrific tax advantages. They defer or eliminate the tax on your contributions and investment earnings, which may allow you to accumulate a bigger balance than with a taxable brokerage account.
Investing money using one or more retirement accounts is wise. If you have a retirement plan at work but aren't participating in it, now's the time to enroll!
So, if you have a retirement plan at work but aren't participating in it, now's the time to enroll! Contribute as much as you can, even if it's just a small amount. Make a goal to increase your contribution rate each year until you're putting away at least 10% to 15% of your pre-tax income.
FREE RESOURCE: Retirement Account Comparison Chart (PDF)—a handy one-page download to see the retirement account rules at a glance.
What is a retirement account rollover?
Don't make the mistake of thinking that once you leave a job with a 401(k) or a 403(b) you can't continue getting tax breaks. Doing a rollover allows you to withdraw funds from a retirement plan with an old employer and transfer them to another eligible retirement account.
When you roll over a workplace retirement account, you don't lose your contributions or investment earnings. And if you're vested, you don't lose any money that your employer may have put into your account as matching funds.
The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process.
The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process. If you miss this deadline and are younger than age 59½, the transaction becomes an early withdrawal. That means it is subject to income tax, plus an additional 10% early withdrawal penalty.
If you're a regular Money Girl podcast listener or reader, you know that I don't recommend taking early withdrawals from retirement accounts. Paying income tax and a penalty is expensive and reduces your nest egg.
If you complete a traditional rollover within the allowable 60-day window, you maintain all the funds' tax-deferred status until you make withdrawals in the future. And with a Roth rollover, you retain the tax-free status of your funds.
What are your retirement account options when leaving a job?
Once you're no longer employed by a company that sponsors your retirement plan, there are four options for managing the account.
1. Cash out your account
Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option. As I mentioned, taking an early withdrawal means you must pay income tax and a 10% penalty.
Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option.
Let's say you have a $100,000 account balance that you cash out. If your average rate for federal and state income taxes is 30%, and you have an additional 10% penalty, you lose 40%. Cracking open your $100,000 nest egg could mean only having $60,000 left, depending on how much you earn.
Note that if your retirement plan has a low balance, such as $1,000 or less, the custodian may automatically cash you out. If so, they're required to withhold 20% for taxes (although you may owe more), file Form 1099-R to document the distribution, and pay you the balance.
2. Maintain your existing account
Most retirement plans allow you to keep money in the account after you're no longer employed if you maintain a minimum balance, such as more than $5,000. If you don't have the minimum, but you have more than the cash-out threshold, the custodian typically has the authority to deposit your money into an IRA in your name.
The downside to leaving money in an old retirement account is that you can't make additional contributions because you're not an employee. However, your funds can continue to grow there. You can manage them any way you like by selling or buying investments from a set menu of options.
The downside to leaving money in an old retirement account is that you can't make additional contributions.
Leaving money in an old retirement plan is certainly better than cashing out and paying taxes and a penalty, but it doesn't give you as much flexibility as you you would get with the next two options I'm going to talk about.
I only recommend leaving money in an old employer's retirement plan if you're happy with the investment choices and the fund and account fees are low. Just make sure that the plan doesn't charge you higher fees once you're no longer an active employee.
Another reason you might want to leave retirement money in an old employer's plan is if you're unemployed or have a job that doesn't offer a retirement account. I'll cover some special legal protections you'll get in just a moment.
3. Rollover to an Individual Retirement Arrangement (IRA)
Another option for your old workplace retirement plan is to roll it into an existing or new traditional IRA. If you have a Roth 401(k) or 403(b), you can roll it over into a Roth IRA. The deadline to complete an IRA rollover is 60 days.
Your earnings in a traditional IRA would continue to grow tax-deferred, just like in your old workplace plan. And earnings grow tax-free in a Roth IRA, like a Roth account at work.
Here are a couple of advantages to moving a workplace plan to an IRA:
- Getting more control. You choose the financial institution and the investments for your IRA.
- Having more flexibility. With an IRA, there are more ways to tap your funds before age 59½ and avoid an early withdrawal penalty than with a workplace account. That rule applies to several exceptions, including using withdrawals for medical bills, college expenses, and buying or building your first home.
Here are some downsides to rolling over a workplace plan to an IRA:
- Having fewer legal protections. Depending on your home state, assets in an IRA may not be protected from creditors.
- Being ineligible for a Roth IRA. When you're a high earner, you may not be allowed to contribute to a Roth IRA. However, you can still manage the account and have tax-free investment earnings.
If you want more control over your investment choices, think you'll need to make withdrawals before retirement, are self-employed, or don't have a job with a retirement plan to roll your account into, having an IRA is a great option.
4. Rollover to a new workplace plan
If you land a new job with a retirement plan, it may allow a rollover from your old plan once you're eligible to participate. While the IRS allows rollovers into most retirement accounts, employer plans aren't required to accept incoming rollovers. So be sure to check with your new plan administrator about what's possible.
Once you initiate a transfer from one workplace plan to another, you must complete it within 60 days to avoid taxes and a penalty.
Here are some advantages of doing a workplace-to-workplace rollover:
- More convenience. Having all your retirement savings in one place may make it easier to manage and track.
- Taking early withdrawals. Retirees can begin taking penalty-free withdrawals from workplace plans as early as age 55.
- Avoiding Roth income limits. Unlike a Roth IRA, there are no income restrictions for participating in a Roth workplace retirement account.
- Getting more legal protections. Workplace retirement plans are covered by the Employee Retirement Income Security Act of 1974 (ERISA), a federal regulation. It doesn't allow creditors (except the federal government) to touch your account balance.
Some downsides to transferring money from one workplace plan to another include:
- Having less flexibility. You can't take money out of a 401(k) or a 403(b) until you leave the company or qualify for an allowable hardship. It doesn't come with as many withdrawal exceptions compared to an IRA.
- Getting less control. You may have fewer investment choices or higher fees than an IRA, depending on the brokerage firm.
5. Rollover to an account for the self-employed
If you left a job to become self-employed, having an IRA is a great option. However, there are other types of retirement accounts that you might consider, such as a solo 401(k) or a SEP-IRA, based on whether you have employees and on your business income.
Read 4 Ways to Start a Retirement Account as a Self-Employed Freelancer or 5 Retirement Options When You're Self-Employed for more information.
When is a Roth rollover allowed?
For a rollover to be tax-free, you must use a like account. For example, if you have a traditional 403(b), you must rollover to another traditional retirement account at work or to a traditional IRA.
If you move traditional, pre-tax funds into a post-tax, Roth account, you must pay income tax on any amount that wasn't previously taxed. That could leave you with a massive tax liability. If you want a Roth, a better move would be to open a Roth account at your new job or to start a Roth IRA (if your income doesn't make you ineligible to contribute).
Where should you move an old retirement account?
The best place for your old retirement account depends on the flexibility and legal protections you want. Other considerations include the quality of your old plan, your income, and whether you have a new job with a retirement plan that accepts rollovers.
The best place for your old retirement account depends on the flexibility and legal protections you want.
The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options. If you have questions about doing a rollover, get advice from your retirement plan custodian. They can walk you through the process to make sure you choose the best investments and don't break the rollover rules.
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