Generations ago, sticking with a single employer for your entire career was a common occurrence. In fact, most of us have a parent, a grandparent, or an aunt or uncle who worked in the same industry for decades before getting a pension and enjoying their golden years.
But these days, it’s rare to stay in the same job for a decade, let alone for your entire adult life. This is partly due to the fact that pensions and long-term benefits are rare, but also, employers don’t always give a good reason to stick around. If you want to earn more money, climb the corporate ladder, or both, you normally need to switch employers (or even industries) to get where you want to be.
But, what happens to your old 401(k) plans? For someone who has had a few different jobs as an adult, it’s not uncommon to have several 401(k) balances with different plan administrators. You may have switched jobs three or four times since your first job after college in your 20’s, but that money is still lingering in your account.
This is where 401(k) rollovers come in. When you roll over a 401(k) — or several old 401(k) plans — you are essentially moving all your retirement funds into a single new account. This new account you roll over into could be a 401(k) with your new employer (if your new employer offers this option), but it could also be an IRA you open with a bank or a brokerage firm.
Why Should You Roll Over Your 401(k)?
It’s easy to let old 401(k) accounts languish where they are, but there are plenty of benefits you can get if you roll over your 401(k) into a new account. For starters, rolling over your 401(k) to a new plan can make planning for retirement easier and less complicated. After all, having one plan to keep track of is infinitely easier than having multiple accounts with their own log-ins and plan fees.
Other benefits of rolling over your old 401(k) plans include the following:
Access to a broader choice of investments
First off, it’s very common for workplace 401(k) plans to be extremely limited in terms of the investment options they include. If you didn’t actually select the investments in your plan, it’s also very possible your old 401(k)s are invested in a Qualified Default Investment Alternative (QDIA) that might not even be ideal.
More and better communication
Your 401(k) administrator won’t have any incentive to communicate with you or keep you abreast of changes to your plan if you’re no longer contributing to your account and you have switched to a new employer. However, rolling over your 401(k) with a brokerage firm you have chosen will make you into a primary customer.
Potential for lower costs
Finally, most people have no idea how much they’re paying in fees on their old 401(k) plans. It’s also possible your old accounts might have administrative fees, management fees, and fund expense ratios that are well beyond what you would pay if you had made the choice from the start.
By rolling over your 401(k)s into a plan you manage yourself, you get the chance to compare brokerage firms based on their reputation, investment options, and related fees. Over time, the difference in fees could add up to a lot more money for retirement.
How to Roll Over Your 401(k)
There are plenty of reasons to consider rolling your 401(k) over to a new account, but the best way to do so really depends on your unique situation. For example, rolling over a 401(k) to a new employer’s 401(k) can be a good idea if they allow it, but only if you are satisfied with the investment options and fees in the new plan.
On the flip side, rolling over a 401(k) into an IRA can make sense if you prefer to manage your account funds yourself, and if you want the chance to pick the investments for your new account. Also keep in mind that rolling over an old 401(k) into an IRA lets you pick the new brokerage firm you want to work with, which can help you get the best investment options and the lowest fees possible.
But, how do you roll over your 401(k)? It’s probably not as difficult as it seems, but here are a few guidelines to consider.
For starters, it is typically best (and easiest) to opt for a direct rollover. This means your old 401(k) plan administrator will send a check for the money in your account directly to your new one. This option is much more convenient, and it gets the job done quickly and without any headaches on your part.
On the other hand, you can have the check made payable to you. However, your old employer is required by the IRS to withhold 20% of your fund balance to account for taxes. You also have just 60 days to put the money into another tax-advantaged account before you are stuck paying a 10% penalty for taking an early withdrawal in the eyes of the IRS.
The Bottom Line
If you have an old 401(k) or several of them and you aren’t sure about your next best steps, rolling over your old account(s) to a new one is usually your best bet. However, you’ll want to have an idea of where to move that money — into an IRA or in your new employer’s 401(k) plan if they have one. You’ll also want to think about the best ways to execute your plan with minimal effort and stress on your part.
This is one area where a fee-only financial advisor can help. Not only can I help you assess your old 401(k) plan details, but I can help you compare your options and find a path forward that will help you reach your goals faster — and with the lowest fees possible.
If you’re overwhelmed with your options but you know you could benefit from unbiased advice, schedule a free consultation today.