If you are considering what to do with an old 401k, I wrote an entire blog about your options here. I briefly mentioned a rollover on that page. Here, I will go into further detail about a rollover and why I think it’s a good idea. There are several factors to consider that your HR department at the job you are about to leave either can’t legally explain to you or they don’t know enough about it. More than likely, it’s both. I’m hoping you’re reading this article BEFORE you choose your 401k option on your exit papers. If not, you’ll be prepared for next time. Some companies require you to make a decision regarding your 401k before you’re officially done. Others will let you leave your 401k alone. Either way, this article should be helpful for you.
Why should you consider a rollover with your old 401k? I’ll give you 5 reasons why it’s something to think about.
1) It will still be tied to your old job in some capacity. Granted, the investment company who holds your 401k is completely separate from your previous employer(unless you worked for that investment company directly as an employee), but it’s common for you to still need to contact your old HR department to get any information. In some cases, you may have a direct login to your 401k account online, so you wouldn’t need the HR department. Otherwise, you’ll likely need to call HR to get any assistance. Is that something you want to do? Did you leave on good terms or do you want nothing to do with your old company? Do you want to rely on the HR department to get you whatever forms you’ll need or meet with you in person to witness a signature(if needed)? Just some things to consider.
2) You are still paying account fees on the 401k, which are higher than an IRA. Typical fees include: administrative fees, management fees, investment fees, and individual service fees. Just the first two fees could cost you close to $1000/yr, not including your investment fees. You’ll need to check on your specific plan to get an accurate figure of what fees you are paying, but you’re likely paying more than you think. Compared to an IRA, the fees are always more unless the employer pays 100% of them. IRAs commonly charge an annual fee, but it’s rarely more than $25 per year. IRAs will also involve investment fees but those come from the investment funds themselves, so it’s a wash if you roll your 401k over to an IRA and then pick the same investments. Still, you’ll save a lot of administrative fees by utilizing an IRA instead of the 401k.
3) You’ll have fewer accounts to keep up with. Having fewer accounts can simplify your life. Plus, chances are you can still select the same exact investments in an IRA if you are hesitant to move the 401k because a particular fund is performing well. There are too many companies to name for selecting your IRA, but if you pick one, you can search the investment options ahead of time before making the switch. Some IRA companies will let you setup separate accounts so you can still keep your 401k money separate from any other existing accounts. I am a fan of consolidating accounts because it’s less paperwork and fewer login IDs to keep up with. You are also charged fewer fees(see #2).
4) If you leave your new job, you already know how to handle the 401k. Changing jobs again after you’ve already handled an old 401k? Guess what? You already know what to do! If you need to select a 401k option as a part of leaving your new job, you already have an account number setup to roll the funds into. It is a MUCH simpler process if the rollover account already exists. No more setup or tracking anything down—you simply plug in the account number for the transfer on the paperwork and you’re done. I am a big fan of the simple option. This is another way to simplify your life when changing jobs.
5) There is no tax liability for a rollover. Whether you roll it into an IRA or a 401k at your new job, the IRS isn’t involved and won’t send you a tax bill. I almost said “no fees” here too, but I have seen at least one company that charges you to roll into an IRA. So, I can’t make that claim here. However, you probably won’t pay any fees to do it either. No taxes plus (maybe) no fees should ease your mind.
There you have it. In my opinion, any one of the things I discussed is a good reason to go ahead and roll it over. When taken together as a whole, there’s no question! It’s a no-brainer. Take the steps to complete the process today if you haven’t done so. This is especially true if you have multiple 401k’s floating around from previous jobs. You’ll be so glad you finally consolidated them.
One additional note: If you had a Traditional 401k, you must roll it into a traditional IRA. If you had a Roth 401k, you’ll need to roll it into a Roth IRA. The tax rules are different on those two accounts, so you want to make sure they are a “like-to-like” transfer, meaning the tax treatment of the accounts are identical. If you switch them around, you WILL have a tax consequence for doing so. If you have part Traditional 401k and part Roth 401k at the same employer and you’re leaving, then perform two separate rollovers into the equivalent types of accounts. It’s important that you understand this point so you don’t mess yourself up. Talk to a tax advisor if you are unsure.
