When to Roll Over an Old 401(k) From a Previous Job
Back in the day, preparing for retirement was a simpler situation: In most cases, you’d work for a company or government agency for a certain number of years, retire, collect your pension and Social Security payments, and voila! Your retirement was taken care of.
Nowadays, the average worker will have 12 jobs over the course of their life, and if they're lucky enough to have retirement savings benefits offered by an employer, it typically comes in a tax-deferred 401(k) rather than a pension.
For every company you work for, you’re often creating a trail of retirement accounts with various levels of funding spread across different employers and benefits administrators. That’s why it’s necessary to keep track of all of your investments and know when the time is right to roll over your 401(k) from a former employer into a different retirement account.
There are a number of reasons why a 401(k) rollover might be a smart move: You could prefer the investment choices in your new employer’s plan or your local bank’s IRA offerings, you might want to organize your retirement accounts to better track your savings progress, or you could even be forced out of an old employer’s 401(k).
Here’s everything you need to consider when deciding whether or not to roll over your 401(k):
Assessing your 401(k) situation:
The first thing you’ll want to do is take a look at your current retirement set up. Figure out how much money you currently have in any employer-sponsored 401(k)s or separate IRAs, what sorts of investments they’ve been allocated to and how those investments are performing.
Do you have a choice in whether you roll over an old 401(k)?
It might surprise you to learn that former employers absolutely can — and often do — kick people out of their prior company’s 401(k) plan.
“An employer is the one that’s really paying for any fees in your retirement account,” says Andrew Meadows, senior vice president at Ubiquity Retirement + Savings. “So if you’re below a certain balance, the law says you can be kicked out of your plan in order to reduce costs for the employer.”
This is known as a “force-out” that, pursuant to IRS guidelines, allows employers to remove previous employees from their retirement plan if they have less than $5,000 vested in the account. While it’s not an issue for everyone, if you have less than $5,000 in an old employer’s plan, then you might have found yourself on the receiving end of a notice to take action.
If you miss the deadline to take action and roll over the money yourself, your former employer is required to move the balance to a low-cost IRA if it is more than $1,000. If it’s less than $1,000, they have the option to just write you a check, and you will then be penalized for an early withdrawal if you do not deposit it into a retirement savings account within 60 days.
If your old 401(k) has more than $5,000, how is it performing?
As with any investment, the goal is to generate more money than you started with. If you have a higher retirement balance with strong returns, then Meadows says nothing is stopping you from just keeping the account as is.
“You can evaluate if you should [roll over] based on how those investments are doing,” he says. “You might have some strong performing, low-cost investments and not want to move it.”
If that’s not the case, or you just like some of the investing options available to you either through your new employer’s plan or an IRA, then doing a rollover could be a good option. This is especially true if you find yourself with more than one account leftover from a previous job. In fact, it's a good idea to use this time to check in not only on the 401(k) from your previous employer, but at any other retirement savings accounts you may have acquired over your career.
Fees to consider before you roll over a 401(k):
You’ll want to pay close attention to the fees in your old employer’s account (if you’re weighing whether to keep your money there), as well as the fees in your new employer’s 401(k) or any IRAs you may be considering.
Many savers don’t realize this, but 401(k)s have a variety of fees associated with them, from the individual funds you’ve invested in to administrative fees from the provider itself — they’re just usually quietly taken out of the account over time. You don’t have much control over the investment options your employer offers in its 401(k), but you do typically have the option to pick certain funds, so be sure to look for the lower-cost options.
If you’re looking to roll over your 401(k) into a traditional or Roth IRA, you’ll have to do more shopping to research how the fee structures will work for different types of investments and account providers. There are a few broad types of fees in an IRA you should look for.
First up: maintenance fees, which can be charged as a percentage of your assets or a flat annual fee. Many brokerages no longer charge this fee, especially for passively managed funds.
Then there’s the investment fees, known as the expense ratio, for the underlying mutual funds and exchange-traded funds in your IRA. For these, look for a fee well below 1%. (The average expense ratio falls around 0.5%)
Finally, when looking at fees related to investing, Meadows recommends avoiding IRAs that charge transaction fees, which are applied when you sell funds, or load fees, which are charged when you make deposits into your account.
Passively managed accounts will always have a lower cost than actively managed accounts, where you’re paying for an investment manager to make decisions about your funds. In theory, there’s nothing wrong with paying extra for great performance in an actively managed fund, but be realistic: very few actively managed funds consistently outperform the market.
“I highly advise anyone to check your fees on a regular basis,” Meadows says. “The closer you get to retirement, the more you’re going to worry about how those fees are eroding your savings.”
How to actually start the 401(k) rollover process:
Once you decide to roll over a 401(k), the next step is to figure out where your money can go and how you can most successfully set yourself up for a secure retirement. Here’s how to roll over a 401(k).
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