The average person holds 11 jobs from the age of 18 to 44, according to the Bureau of Labor Statistics, and for many of us that means 11 or more workplace retirement accounts. Because not all employer plans require you to leave the plan when you leave the company, you could end up with several, disparate retirement accounts.
To get a clearer picture of your money, consolidating old workplace accounts to an IRA or your next employer plan makes a lot of sense. But the decision of whether and how to "roll over" your 401(k) or other workplace retirement account is an important one, especially considering that these accounts make up the bulk of workers' savings.
Understand your options. When you leave a job, you typically have four options: leave the money in your old employer's plan, roll it into your new employer's plan, put it into an IRA, or withdraw the balance.
- When to stay put: If your current plan has great investment options at low prices, it won't charge you fees to stay in the plan (ask HR to find out), and you don't mind getting one more brokerage statement, it's fine to leave it where it is.
- When to roll in: If you have access to your new retirement plan right away, and the options are good and cheap, it's fine to roll your old balance into your new account.
- When to rollover: More often than not, neither of the above are really great options. If that's the case, you can move your funds into a rollover IRA a kind of brokerage account that tends to offer far more options.
- Don't cash out: Unless you really need the money, don't withdraw it. You'll pay income tax on the money, plus a 10% penalty for early withdrawal if you're under age 59 1/2. For Roth 401(k)'s, only the earnings (non-contribution portion) are subject to the penalty and income tax, though in some cases--qualified early withdrawals--are not subject to the penalty.
Move the funds. If you decide to roll over your 401(k), you'll just need to make a few phone calls to get started.
- Open an IRA. In order to roll over your workplace retirement account, you'll need an IRA to move the funds into. The major brokerage firms all offer them.
- Contact your old plan. Once you've got an IRA, call the company that runs your old 401(k). (It could be an investment firm like Fidelity or a consultancy like Hewitt.) Ask them to transfer your 401(k) distributions directly into your IRA.
- What you'll need: Ask your former plan administrator for a list of all the information they require. Typically, you will need to provide your contact information and the account and routing numbers for the brokerage account where you'll send the money, and select the type of distribution you'd like (opt for direct rollover, which moves the money directly into your IRA, if you can).
Time it right. Waiting too long to roll over your 401(k) could be costly.
- Act fast. If your old plan sends you the balance of your account as a check--called a "distribution"--you have just 60 days from the time you receive to roll it into your IRA. Otherwise you'll face penalties.
- Know the cost. If you try to move your distributions into an IRA after this period, the distribution will be considered a withdrawal, and you'll be forced to pay income tax plus a 10% penalty.
What not to do in order to avoid these common rollover pitfalls.
- Don't make rash decisions about investments. Once you've rolled over your 401(k) into an IRA, you'll be faced with decisions about how to invest. It's important to take your time with your investment choices to ensure that your portfolio contains a diverse range of investments, including index funds, mutual funds and fixed-income options like bonds and CDs.
- Don't forget about the big picture. When making your investment decisions, it's important to look at all of your retirement accounts, not just the new one, to determine whether your asset allocation is consistent with your goals across all of these accounts.
- Don't fly solo. Almost everyone could use a second opinion about how to invest and manage their retirement fund, so consider hiring a financial advisor. You can find one at NAPFA.
For more try these sites and resources:SmartMoney.com Retirement Planner, IRS Retirement Plan Rollover site, SmartMoney.com 401(k) explainer, Brightscope.com to evaluate your old plan, our latest Retirement news and tools.