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I have 2 401k plans from previous employers. Should I combine them with an existing rollover IRA or into my new TSP with my new position as a federal employee? Or should I combine all 3 into my TSP to have only 1 retirement account?

The existing rollover IRA is with Fidelity, worth about $16k, the amount to add totals about $10k, and the TSP has just started and is very low in value.

Oct 22, 2012 by Angela from Washington, DC in  |  Flag
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16 votes

Having fewer retirement accounts sounds much cleaner and easier to manage, no doubt about that. Depending on your situation, you should consider these benefits of rolling old 401ks into your existing IRA:

  1. Greater flexibility in choosing your investments. Fidelity makes the entire investment universe available to you, your Thrift Savings Plan (TSP) will not. If you are knowledgeable about how to research investments, Fidelity should be more attractive to you (lower expenses ratios, better investment profiles).

  2. Your retirement savings will continue growing tax-deferred, but you can also convert some of your IRA to a Roth. The TSP Roth provision is a relatively new feature and your plan may not have that available yet. A conversion in 2012 will trigger a bigger federal income tax bill for this year -- and maybe a bigger state income tax bill too. However, two positive factors may outweigh the extra tax hit: a) today's federal income tax rates might be the lowest you'll see in your lifetime, b) if you convert this year, you don't have to worry about it being hit with the new 3.8% Medicare surtax on investment income, which will kick in next year.

  3. Easier to move or transfer your individual retirement account from one custodian to another. If you get discouraged with Fidelity, or find they are charging you too much, there are plenty of options out ther. Your TSP will be "locked" until you either retire or leave that employer.

  4. Withdrawing money from your IRA (income taxes and potential penalties may apply) for things like college expenses, health insurance premiums or the purchase of a new home is easier than from an TSP. That said, find out if your TSP has a loan provision. This feature may end up being more valuable to you depending on your specific situation.

  5. Marriages and marital problems are another reason to consider an IRA rollover. Your surviving spouse is automatically entitled to your 401k funds if you die. That could be a problem if you have children from a prior marriage and want them to share in your retirement savings. You can only change the 401k beneficiary if your spouse notarize his consent. On the other hand, your IRA rollover provides greater range of flexibility in terms of beneficiary designations; you can have as many as you need.

It sounds like you may be at the front end of your career, but there are times when it makes sense to stick with your 401ks/TSP, at least for a while. For instance, if you retire or get laid off between ages 55 and 59 1/2, you can take penalty-free withdrawals from a 401(k). You'll pay income taxes, but you won't have to pay the 10% penalty. If you roll your money into an IRA, you must wait until age 59 1/2 to withdraw without a penalty.

Regardless your political views, income tax rates are likely going up. So contribute as much as you can to your TSP and keeping up the good work saving for retirement!

3 Comments   |  Flag   |  Oct 22, 2012 from Berwyn, PA
Angela

Thank you! You're right, I am in the beginning portion of my career and I expect to be working for at least 30 more years.

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Flag |  Oct 22, 2012 near Washington, DC
Erik Evans, CFP®

Now that I know that, if you are comfortable researching and picking investments (or at least willing to teach yourself), I recommend consolidating accounts to your IRA. Fidelity is an excellent low cost provider (good work!), and be sure to check out iShares Exchange Traded Funds (ETFs) available on their platform. Last I checked they had a promotional offer and waived all transaction fees -- https://www.fidelity.com/etfs/ishares. And once you save up at little more, consider working with a fee-only financial advisor.

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Flag |  Oct 22, 2012 near Berwyn, PA
Angela

Great, thanks again!

Flag |  Oct 22, 2012 near Washington, DC

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10 votes

Hi Angela,

There are several aspects to consider as you decide on your course of action. I'll try to simplify it as much as possible.

For many 401(k) plans, the driving factor of account success (ie - performance) has to do with 2 things. First - how many investment options you have - and Secondly - what are the fees and costs within the account that you are paying. Based upon the information you have provided - my initial assessment would be that you would likely be better off focussing on keeping your costs low than worrying about how great a portfolio you can build with many investment options.

The Federal TSP has extremely low investment options and enough of them to build a rudimentary portfolio that should grow effectively if you add to it every paycheck. So, from that aspect, I LIKE the idea of consolidating your accounts within the TSP. Additionally, putting all of your accounts into ONE account allows you to develop and control and investment POLICY, as opposed to chasing each account all over the place, each one with its own structure and portfolio.

HOWEVER - there is another consideration. Unlike IRA's - 401(k) plans allow for withdrawals with NO 10% TAX PENALTY as early as AGE 55 - IF you are separated from that employer. With IRA's and ACTIVE PLANS ( ie - your current TSP) the earliest you can withdraw funds without this penalty is age 50 and 1/2. So - if you feel that you might need the funds prior to age 59 and 1/2 - then you might want to keep at least one of the 401(k) accounts open just for emergencies.

Jon Castle http://www.WealthGuards.com

2 Comments   |  Flag   |  Oct 22, 2012 from Jacksonville, FL
Jonathan N. Castle, MSFS, CFP®

Correction - I mistyped - the earliest you can pull from IRA's and Active Plans is AGE 59 and 1/2. Hit the wrong button. 59 and 1/2

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Flag |  Oct 22, 2012 near Jacksonville, FL
Angela

Thank you!

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Flag |  Oct 22, 2012 near Washington, DC

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6 votes

Angela, this is a great question. I generally recommend that individuals roll prior plans into an IRA account. My rationale is that by doing so, individuals generally have greater investment options than what is available through most 401(k) plans.

1 Comment   |  Flag   |  Oct 22, 2012 from Fort Worth, TX
Angela

Thank you!

Flag |  Oct 22, 2012 near Washington, DC

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4 votes

Angela! Great question! I would recommend you consolidate all your accounts into your new employers TSP plan. It will be easier for you to manage, and potentially provide lower cost of annual management and custodial fees due to the size of your account.

2 Comments   |  Flag   |  Oct 22, 2012 from Newburyport, MA
Angela

Thank you!

1 like | 
Flag |  Oct 22, 2012 near Washington, DC
Don Unger, MSFS

I also like the idea of having old 401Ks rolled into your own managed IRA. You have more contro, sometimes better investment options and maybe even better beneficary options.

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Flag |  Oct 23, 2012 near Henrico, VA

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2 votes

Angela,

I am tempted to agree with Paul on this one. The TSP is generally a very low cost plan. True, you do not have the world of investment options available to you; however, you may not be inclined to use the world of investment options. Perhaps you should stick with those choice that have been vetted by a plan fiduciary to be offered to you in the TSP. Having it all in one place can make it more manageable as well. Really, the true answer depends on your personal situation and comfort with investing.

Comment   |  Flag   |  Oct 23, 2012 from Austin, TX

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