A lot of people I know have an old 401k or IRA at their previous employer, so I get asked this question a lot. The answer, ultimately, will be dependent on you and what you feel comfortable doing. However, here are a few directions you can take your old retirement accounts.
First of all, there is nothing wrong with leaving your account as is after you leave a company. You will want to make sure that your account is invested correctly. That money market that you fled to a couple of years ago when the market was tanking should be getting put to better use if you truly believe your retirement account to be long term investments.
If you want to move your account and/or consolidate your accounts, you have a few options:
Rollover IRA
You can “roll” your old 401k/403b account(s) into a rollover IRA. You will, ideally, want to do a direct rollover, which means your 401k company sends your money directly to your Rollover IRA without you physically handling the money. If your old retirement administrator does send you a check, you have 60 days to get it into your Rollover IRA via a 60 day rollover. There are limitations to numerous rollovers if you think there are any loopholes, so don’t think you use a 60 day rollover as a short term loan shark.
You will do the paperwork at the receiving company. For example, if Charles Schwab handles your old 401k and you want to move it to Fidelity Investments, you will do Fidelity’s paperwork to open the account and transfer the funds. Both Charles Schwab and Fidelity are good/cheap places to bring your rollovers. I would call them and have a rep assist you with the process. You are bringing new money to them and they will make the process as painless as possible.
You can move as many old 401k’s to the same rollover account following the same procedure mentioned above. That means, you could consolidate all of your old 401k’s to one account. Think of the trees that you would be saving.
Rollover to Your Current Employers 401k
If your company accepts old 401k’s/403b’s, you can move rollover your accounts to your current employers 401k/403b. Again, you will do the paperwork on the receiver’s end. Make sure you check if this is possible with your current retirement account administrator.
I actually rolled my previous employers account to my new employers administrator. I did it to keep things simple and maintain all of my retirement funds in one account.
A potential downside to moving to a current employers account is that some employers give their employees very few investing options. This is sometimes a good thing; investing doesn’t need to be complicated. But, moving your old retirement account to a rollover IRA gives you more investment options and provide free and easy ways to buy into funds.
Taxation of a Rollover
Doing a direct rollover causes no tax implications, but can give you a scare if you don’t keep the proper paperwork or know the tax forms. Here’s what normally happens: You move a $20,000 401k from your old employer to a new rollover IRA account. You’ve done everything right and moved the funds directly. February comes around and your old 401k administrator sends you a 1099-R tax form stating that you withdrew $20,000 the previous year. You research what the form means and find out you owe taxes on $20,000 of income that you have not seen.
To avoid panic when it happens, remember that a 5498 form is on its way from your new retirement administrator stating that you directly rolled this money into your new account and will cancel out the 1099 form sent. Unfortunately, the 5498 form is one of the last forms to be sent out, so it leaves you anxious for a while.
What are doing with your old retirement accounts?
Please note: this post doesn’t cover all situations that can be experienced with a retirement account transfer. Please check with your tax advisor and your accountant for more details based on your situation.
