401k Rollovers – Why Bother?

If you’re like most Americans, you’ve been employed at a string of jobs throughout your career, possibly leaving behind a collection of partially-funded employer-sponsored retirement plans.  Consolidating these accounts into a single central Roth IRA tends to make great fiscal sense, but you’ll have to be mindful to structure 401k rollovers properly so as to prevent expensive penalties and unnecessary taxes.

Why should you bother consolidating your previous retirement plan accounts?  Though any cash you’ve invested in employer-sponsored pension or defined contribution programs will continue to grow left untouched, even after you’ve left the respective employers, you are likely not maximizing the after-tax benefits and growth. For starters, retirement plan accounts should get the benefit of rebalancing so as to ensure that your funding options stay in line with a pre-structured investment allocation that you should have (e.g. 50% stocks, 30% bonds, 20% hard assets funds).  It’s  more probable that you’ll correctly manage one account in place of dividing your time over several separate plans.  This reason alone makes 401k rollovers sensible.

Additionally, it’s critical to know that employer-sponsored options are notoriously minimal in their investment selections.  By keeping the investment menu small and uncomplicated, the employer hopes to encourage better employee participation.  Therefore, you’re likely not gong to have the best investment choices for maximizing your investment allocation, asset preservation or growth possibilities by leaving the funds in old and limited accounts.  By rolling your outdated and limited employer-sponsored retirement programs into a central account by means of a 401k rollover to an IRA, you’ll enjoy wider possibilities and hopefully the opportunity for better returns.

So now that you see why 401k rollovers are actually a very good idea, let’s take a look at the way to do it.  To initiate 401k rollovers, you’ll should first establish the IRA account into which you’ll be transferring the money.  Though you are able to elect to rollover your old funds into a new employer-sponsored account (e.g. with your present employer), you’ll get the most benefit, as you have learned above, should you open a separate IRA – like your standard bank or brokerage firm.  This IRA could be a traditional IRA or Roth IRA but we cover the 401k rollover to Roth IRA in a separate post.

Once your new account is established, you’ll be able to start the 401k rollovers procedure.  Contact to the Human Resources departments at your respective ex-employers or representatives  at the administrator of each old employer-sponsored retirement plan.  Request the documentation required to initiate a 401k rollover.  Every entity will have slightly distinct paperwork but all of them will include at the very least two main sections – a location to enter details in regards to the account receiving the 401k rollover funds (i.e. your new IRA)  along with a section describing the way you’d such as the transaction to occur.

The section detailing how 401k rollovers will occur typically offers two alternatives

–have the plan send you a check (to then deposit into your new IRA)
–send the check directly to the custodian of your new IRA (the bank or brokerage firm)

Always choose the second choice for 401k rollovers as it will avoid a set of problems covered in another article.

Avoid taking any money to spend although you may be tempted. Any cash you distribute to yourself out of the tax-deferred retirement plan account will be taxed in accordance with your current income tax rate.  Additionally, if under age 59 1/2 there is an IRA penalty.  Therefore, exhaust all other financial resources before using funds form retirement plans and complete 401k rollovers with 100% of the funds.