Financial Housekeeping: What To Do with Those “Old” 401(k)s

There is no shame in owning multiple  401(k) or 403(b) accounts—the fact that they exist indicates a commitment to retirement savings. What may bring on a twinge of guilt (and rightfully so) is the neglect of these accounts, such as ignoring how the money is invested and leaving quarterly statements unopened.

Sound familiar? Rest assured that you’re not alone. When leaving an employer many people opt to take the easy way out and check the box next to “no change, leave funds in current 401(k).” Then they go on to their next job and forget about it. For some, this may be the best option, but for many, it’s not.

When is it a good idea to leave your 401(k) with your old employer?

  • If you have a small balance (usually less than $20,000–$25,000), otherwise you’ll pay a custodian (bank or brokerage) an annual maintenance fee to hold the account.
  • If you like the investment options available to you and don’t have the time or inclination to investigate the best place to invest outside the 401(k).

In other situations, it makes more financial sense to choose one of the other options available to you:

  1. Rollover the 401(k) to a self-directed IRA in an account at a new custodian. You can then manage it yourself with the help of an advisor or online investment service.
  2. Rollover the 401(k) into your new employer’s 401(k) if there are decent investment options available, you have a small balance, or you don’t want to manage it yourself.

There is a fourth option: cash out and pay tax and penalties (with some exceptions) on the balance. However, this is not a smart choice for most people.

There are many advantages to rolling over to a self-directed IRA:

  • Gives you more investment options, including exchange-traded funds and stocks.
  • Possibly reduces 401(k) record-keeping and other account maintenance fees.
  • Reduces the number of investment statements you receive.
  • Reduces the chances of duplication in your portfolio.
  • Decreases the possibility that you will “forget” about your money.

Here are the steps you need to take to rollover your old 401(k) into an IRA:

  1. Open an IRA account at your chosen custodian or let your financial advisor know that you want to rollover your employer retirement account and they will send you the account application paperwork.
  2. Contact the plan administrator for your previous employer company and ask to be sent an IRA rollover form or ask if you can execute the rollover on-line.
  3. Be sure to check the boxes for no tax withholding; because you are planning to roll the funds over, there will be no tax consequences. Some companies will conduct a trustee-to-trustee transfer, which means you won’t have to handle the money, but most send checks made out to the new custodian. The check will be written to the name of the new custodian, FBO (for the benefit of) your name and your new IRA account #.
  4. You will then mail the check to your new custodian to deposit into your IRA. There may be a one-time fee – $25-50$ to execute the rollover.
  5. It’s also important to know that the mutual funds you own in your 401(k), will most likely be sold and the money will be moved to a cash account prior to the rollover. This means that you must go invest the cash in your new IRA account after the rollover is complete.

Do you want to manage your money (and life!) better?

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