In case you're like most Americans, you've already been employed with multiple jobs through your career, leaving behind a path of partially-funded employer-sponsored retirement accounts. Consolidating these company accounts into one core IRA makes very good financial sense, however you'll need to be careful for you to structure the 401k IRA rollover process appropriately in order to avoid costly fines.
But first, why should you trouble yourself consolidating your previous retirement accounts? Although virtually any funds you've invested in employer-sponsored retirement plans will continue to grow untouched, even after you've quit their respective companies, you aren't earning the absolute maximum possible benefit from the retirement savings.
First of all, 401k investments must be periodically rebalanced in order to ensure that your particular investment options stay in line with your personal savings objectives. It's much more likely that you'll properly manage one account instead of dividing your time and effort over several different programs. Therefore, consolidation makes practical sense.
Additionally, it's important to take into account that employer-sponsored plans are limited as to the investment options. The simplicity of a few choices is done in order to motivate greater employee engagement in contributing to the plan. However, in practice, the limited options mean you likely won't get the best-performing retirement savings programs. By rolling your previous employer-sponsored retirement plans in to a central account by way of a 401k IRA rollover, you'll have access to any wider range of investing opportunities with greater potential returns.
Now to understand why any 401k IRA rollover is a good move, let's look at how to get it done. To initiate the 401k IRA rollover process, you'll have to first establish the particular IRA into which usually you'll be moving the selected employer funds. Note that you may have an option to move an account with an old employer into the 401k plan of your current employer, but then you will again have the issue of limited investment options. So its best to establish a new IRA at a bank of brokerage (or you can use an existing IRA) to received your 401k IRA rollover funds.
Once your brand new account is established, you can begin the 401k IRA rollover process. Contact the HR departments of your ex-employers or reps of each old employer-sponsored retirement plan provider and request the documentation required to initiate a 401k IRA rollover. Each plan will have slightly varying paperwork, but these will include at least 2 major sections: a place to enter information about the account receiving the 401k IRA rollover money and a section conveying how you'd like the transfer to occur.
In the area detailing how the 401k IRA rollover will occur, you'll generally have two choices. Either the actual retirement plan vendors will handle the transfer amongst themselves (your ex-employer sending a check directly to your IRA custodian, called direct rollover), with no involvement from you, OR you can receive a check which you will deposit into the IRA rollover account. In almost all circumstances, it's best to allow the organizations to handle the 401k IRA rollover internally, because this will help you to avoid the probable penalties that could use if the funds aren't reinvested in a specific period of time. You will also avoid needless income tax withholding.
Once your funds arrive into your 401k IRA rollover account, then make your investment choices and start growing your retirement wealth!
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions