Sunderram, If you’re like most people, you might have left your monies with your previous employer because it was the path of least resistance. Another reason is you might not have been sure where to transfer them and the daunting task of managing your nest egg. The whole point of these plans is to invest for retirement so what you’ll actually be investing in is kind of important. One of the advantages of an IRA is that it can offer you the most number of options since you can open one at practically any financial institution. You can also have a broker or financial adviser help manage it. However, you may have access to lower cost versions of mutual funds or even unique investment opportunities in your employer plan that may not be available in an IRA. The real focus should be on risk adjusted performance and not the fee. Here are a few issues to consider before taking the next steps:
Will you really be able to manage multiple accounts? Unless your money is all invested in “set it and forget it” asset allocation funds such as balanced or target date funds you’ll at least need to rebalance your portfolio periodically. This would be much easier if your retirement funds were all in one place.
Do you have employer stock? If so, rolling into an IRA could lose you some tax benefits.
Would you like to be able to borrow from the account? Your employer’s plan may allow you to take loans, which are not allowed from IRAs and generally not from previous employer plans.
Are you planning to retire between 55 and 59 1/2? If you’re at least age 55 when you leave your employer, you can start making withdrawals of any amount for any reason right away without penalty. With IRAs and most other retirement plans, you’ll have to wait until age 59 1/2.
Are you just sick of trying to keep track of all those different statements? Let’s be honest. This is probably the main reason you’d like to consolidate them. If none of the previous considerations give you a reason not to, go ahead and roll it into your current employer’s plan. At least you’ll be saving some trees.
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Also, as a result of the American Taxpayer Relief Act of 2012, you now have the option to convert your 401(k) to a Roth 401(k). As mentioned above, consult with a qualified, objective advisor to see if this is a good idea for you.
You have 4 options: 1. Withdraw the cash value of your 401k account. 2. Leave the funds in your previous company's 401k plan, provided the plan permits funds from terminated employees. 3. Transfer the cash value to an IRA. 4. Transfer the cash value to the 401k at your new company provided the plan permits incoming rollovers.
Option 1 is generally not attractive as you will be taxed on the amount withdrawn. In addition, if you are under age 59-1/2, you will owe an additional 10% penalty. Options 2, 3, and 4 depend on a comparison among your old company's 401k plan, your new company's 401k plan, and the investments you could/would make in an IRA account.
Such a comparison should include quality of the investments, costs, and other factors which are not always simple and straightforward. A qualified, objective financial advisor can help with this comparison.
If you rollover your 401(k) to a ‘rollover’ IRA, you will likely have more freedom in selecting investment choices that may be better suited to your personal investment style. You could also have more control over fees.
Consult a local qualified investment advisor. Find one that you feel comfortable with. Ask questions.
One clarification in your question - it is you who must manage your 401k, not your previous or even current employer. The plans provide investment options that you must choose, monitor and rebalance.
One point already mentioned I will emphasize is the ability to begin drawing from a 401k at age 55 without 10% penalty (there will be taxes). IRA withdrawals (in general) incur the 10% penalty up to age 59.5. This may be important for some with liquidity needs and very handy for others managing income recognition.
Another point not mentioned relates to Traditional to Roth IRA conversions. 401k balances are not considered when determining the portion of conversion that is taxable.