Should a Career Move Always Mean a 401(k) Move?

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There's no shame in having multiple 401(k) accounts -- it's an indication that you've been committed to saving for retirement for awhile -- at least, long enough to have been through several employers. However, what may give you a justifiable twinge of guilt is ignoring them.

If you are guilty as charged, you're not alone. Half of the people who change employers leave their 401(k) money where it is, according to an ING Direct survey. The result: "15 million orphaned 401(k) accounts representing more than $1 trillion." For some, this is an OK option. For many, it's not.

Keeping the 401(k) With Your Old Employer

It is probably better to move your 401(k), either into a traditional IRA, a traditional 401(k), or a Roth 401(k) -- mainly to avoid the out-of-sight, out-of-mind issues. But it may make sense to leave it where it is in these situations:

  • You like the investment options your old employer offered, and have been happy with the performance.
  • You are aware of the associated costs and fees and they seem reasonable.
  • Your former company doesn't require that you move the account due to a low balance (usually $5,000 or below).
  • You don't have currently the time or inclination to decide where to open a rollover individual retirement account and how to invest it. Many 401(k) plan agreements require the investments within them to be sold and placed in cash before the funds can be rolled over into a new account. Your balance would stay in cash for awhile, earning little, if you're not prepare to reinvest it now.

Options for Moving Your 401(k)

You can roll over a 401(k) to a self-directed IRA in an account with a new custodian, such as TD Ameritrade (AMTD), Charles Schwab (SCHW), Fidelity (FNF), Vanguard, among many others. You can then manage it yourself or with the help of a financial adviser. Or, if your new employer will accept rollovers from a previous company plan, you can roll your old 401(k) into your new employer's 401(k) plan.

In both cases, it's a very simple transaction:
  • Ask the plan administrator at your previous employer company for a 401(k) rollover form. Check the boxes and fill out information for a direct rollover to the new IRA custodian or new 401 (k) plan. If there is a question about tax withholding on the form, be sure and check that you don't want tax withheld. Most companies will conduct this type of direct trustee-to-trustee transfer, which means you won't have to handle the money. However, some companies will send checks made out to your new custodian in care of your new IRA or company plan.
  • In the meantime, if you are rolling over to an IRA, open a new like-kind (traditional or Roth) IRA account at your chosen custodian. If you are rolling over to your new company plan, make sure you have enrolled in the 401(k) plan and have informed your employee benefits administrator of your intent to roll money into the plan. In both cases your account balance should be transferred within the month.
  • If instead, an eligible rollover distribution is paid to you (referred to as an indirect rollover), you have 60 days from the date you receive it to roll it over to another eligible retirement plan. Any taxable eligible rollover distribution paid from an employer-sponsored retirement plan to you is subject to a mandatory income tax withholding of 20 percent, even if you intend to roll it over later. If you do roll it over and want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld.
What you don't want to do is cash out your old 401(k) accounts -- meaning you don't want to remove the money from them in a way that costs you its tax-deferred status. With a traditional 401(k), If you are younger than 59½, you will pay income tax plus a 10 percent penalty on the withdrawal. If you are older than 59½, you will owe income tax. With the Roth 401(k), you would not pay tax on your contribution amounts, but any gains or earnings would be taxed the same as a traditional 401(k) withdrawal. Letting the accounts grow tax-deferred is the best option for growing your retirement nest egg.

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