Rolling Over My 401(k)

You have a new job … and a nice sum of money in your 401(k) from your old one. What to do? There are a number of options. But experts say the best move may be to roll it over into an IRA, which will give you the greatest flexibility.

By Kate Ashford

Robin Mayhall*, 40, left her position at a nonprofit organization a few years ago for a job in corporate communications at a large insurance company. She’s contributing to her 401(k) at the new firm, and her savings grew to a nice sum of money.

But she left some money behind in the 401(k) at her old job, and she doesn’t know what to do with it. “I’m not sure if I should roll it over, or if it’s okay to just leave it alone,” says Mayhall, who lives in Baton Rouge, LA. “If I roll it over, should I put it in my current retirement account or open an IRA? I’m really confused.”
The right moves with your old retirement account can yield better returns, lower fees, and more effective management.
It’s easy to feel bewildered by all the options. But doing nothing is seldom the best choice when you’re dealing with an old retirement account. The right moves can yield better returns, lower fees, fewer taxes and more effective management. Below are some tips that can help.
Try not to cash out
Apparently almost half of U.S. workers cash out when they leave one job for another, according to a study by Hewitt Associates. It can be particularly tempting if you’ve only been at a job a short while and don’t have a lot of money in your 401(k).

Cashing out is almost never a good idea. If you’re paying 28% in income tax and you take your $15,000 and run, you’ll be left with only $9,300 after taxes—which includes a 10% early withdrawal penalty if you’re under age 59 ½ . If you roll the money to an IRA and keep it invested for 15 years, at 6% annually, you’d have nearly $36,000.
Think IRA rollover
Sure, you can roll your old 401(k) money into your new 401(k), but it’s usually not the best option. Company 401(k)s, by their very nature, offer limited investment options, and they may carry higher fees than you realize.

“Although not in all circumstances, our best advice would usually be to roll it over to an IRA,” says Greg Denton, manager of Life Event Services at Wells Fargo Advisors. “You gain control there and investment flexibility.” You can open an IRA at banks, brokerages, and mutual fund companies.

Rolling over into an IRA can help keep you from forgetting about the account. If you leave a trail of 401(k)s behind, what are the chances you’re going to check in on a regular basis and rebalance at appropriate intervals?
Or convert to a Roth
A traditional IRA isn’t your only rollover option. You can convert your old 401(k) directly into a Roth IRA. The advantages are the same as with a regular IRA — more flexibility — and you’ll be able to withdraw the entire amount in retirement, tax free.

But here’s the rub with a Roth: When you convert, you’ll need enough extra cash on hand to pay the upfront taxes without dipping into your retirement funds. So if you’re in the 28% tax bracket and you’re converting $50,000, you’ll need an extra $14,000 to cover the taxes resulting from the conversion. If you don’t have the cash, experts agree that you should probably stick to a traditional IRA. Please be aware that Roth conversions are not suitable for all investors. You should consult your tax advisor for more information regarding this option.
Think about keeping it under one roof
In addition to rolling over your retirement funds to an IRA at a bank, brokerage, or mutual fund company, you may be able to roll it over to an IRA with the same company that’s administering your old 401(k). “Many providers would love to keep those assets and just roll them over to an IRA,” says Mary Hollingsworth, Director of Institutional Retirement client communications, for Wells Fargo.

However, if you have other IRA assets elsewhere, it may make sense to roll the money over to that institution so all your funds are in the same place — it’s easier to keep track. Wherever you decide to put the money, give customer service at that company a call and they’ll lead you through the rollover process over the phone.

They can even help you figure out which funds to put in your new IRA - selecting those that are most like the funds you had in your old 401(k)(assuming you were satisfied with that mix). Check out Wells Fargo’s Rollover Center for more info.
Don’t leave small accounts behind
If you leave a position shortly after you started, or there was a significant waiting period before you could contribute to the 401(k) at the company you’re leaving, you may only have a few thousand dollars in your retirement account.

Be forewarned: At many firms, if you leave a balance of less than $5,000 for more than six months (the time frame varies at different companies), they will automatically send you a check, less 20% withheld for taxes.

If you then roll the money over, you’ll have to come up with the missing 20% out of pocket to avoid the amount withheld for taxes being treated like a retirement plan payout. If you don’t roll over the withheld amount, you’ll likely pay taxes on this money, plus the 10% penalty if applicable.

Roll the money over immediately and avoid the headache. Or at the very least, ask about your company’s policy.
Keep the big picture in mind
During the rollover process (and in general), remember that you should be maintaining your investment mix across all of your accounts — including your other 401(k)s and IRAs. In other words, if you’re trying to keep 50% of your money in stocks, make sure you’re including all of your investments in that ratio.

“The best way to keep track of this is to work with your financial advisor,” Denton says. The advisor will look at all of your accounts together to check the overall asset allocation.
Dot your I’s and cross your T’s
When you’re rolling over an account, have your old 401(k) administrator send the check directly to your new retirement account administrator.

Or, if they must send it to you, make sure it’s made out to your new retirement plan. For instance, “Wells Fargo, for benefit of Your Name.” Otherwise, it’s considered a payout, and you’re back to square one. The devil is definitely in the details.

Key Points:

  • Don’t leave your 401(k) money behind when you leave one job for another.
  • Consider rolling it over into an IRA, which should give you more investment choices.
  • As you’re doing the rollover, remember to consider the investment mix across all your accounts.
Kate Ashford writes about personal finance and health. Her work has appeared in Money, More, and Good Housekeeping, among other publications.

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