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When you get a new job, you may move on, but your 401(k) money often stays in your former employer's plan. If you have more than a few jobs before you retire, you might find it harder to plan for retirement or you could even lose track of an old account.
A rollover IRA might help. You can roll your 401(k) and other employer-based retirement accounts into a single IRA to make retirement planning and investing easier. You can also include stray IRA accounts from multiple providers. Here's how to decide if combining IRAs is a good idea for you—and how to combine them without running into problems with the IRS.
4 Reasons to Roll Over Your 401(k)s and IRAs
The case for rolling over your 401(k) and IRA accounts goes beyond convenience: Pooling your retirement money can make it easier to manage and grow your savings. Here are five good reasons to consider a rollover:
1. One Account Is Easier to Track
It's easier to wrap your head around your money when it's all in one place. Your accounts may be less likely to fall through the cracks if you lose touch with your plan administrator or your former employer goes out of business.
2. You Have More Investment Choices
An employer-based 401(k) account typically works with a single provider and a set roster of funds. By contrast, you can set up a rollover IRA at the firm of your choice, where you can pick from a wide range of investments.
3. Diversifying Investments Is Simpler
It's important to diversify your retirement investments among stocks, bonds, mutual funds and other investments. This requires taking a holistic view of all your accounts and re-balancing them periodically. Having your investments in one place makes these calculations and moves simpler.
4. Your Money Is Easier to Access
Having your accounts all in one place means you won't have to orchestrate payments from multiple sources when you retire. If you plan to pass along wealth to your heirs, rolling your IRAs into one spares your loved ones from having to track down your accounts and contend with different financial institutions.
5. You Can Potentially Save on Fees
Consolidating your money into one IRA may reduce the management and administrative fees you've been paying, which can eat into your investment returns over time.
Is It Ever a Bad Idea to Roll Over a 401(k)?
Before making the switch, consider these factors:
- You may lose access to special investments available through your employer only. Assets may have to be converted to cash before they're transferred.
- You can't borrow against an IRA as you sometimes can against your 401(k).
- You may have to take required minimum distributions from an IRA at age 72, even if you're still working.
- IRAs may have less creditor protection if you declare bankruptcy, at least in some states.
- Most 401(k)s allow you to withdraw money without penalty after age 55. IRAs require that you wait until age 59½ to avoid early withdrawal penalties.
How to Consolidate 401(k)s and IRAs
You have two basic options if you want to streamline your retirement accounts:
Open a Rollover IRA
Move your money into a rollover IRA with a brokerage company or financial advisor of your choice. You can roll funds from a 401(k), 403(b), 457(b), SEP-IRA and qualifying SIMPLE plan. You can also transfer funds from another traditional IRA.
Ask your investment company if you can roll your 401(k) money into an existing traditional IRA. Many will steer you toward a separate rollover IRA, but once your money is in a rollover account, you can transfer it to your existing IRA if you want all your retirement money in one place. Be aware: You can only do one IRA-to-IRA rollover per year.
Roll Into a 401(k) With Your Current Employer
If you have just one 401(k) to roll over or you've already consolidated your money into a rollover IRA, you may be able to get your current employer to add these funds to your current 401(k) plan. Employers aren't required to accept reverse rollovers, and some plans won't accept rollover IRAs if you've made contributions on top of the money you rolled over from past employer plans. Ask your current plan administrator for rules and details.
3 Steps to Complete an IRA Rollover
The rollover process itself is simple, but it's important to follow IRS rules. Here are the steps:
- Notify your current 401(k) provider that you want to roll funds into your existing IRA or a new rollover IRA account with the provider of your choice.
- Notify the administrators of any older 401(k)s or IRAs that you want to roll over funds.
- Choose a direct or indirect rollover. With an indirect rollover, your old account administrator closes your account and sends you a check or wire deposit. You have 60 days to deposit the funds into a qualified rollover account. With a direct rollover, your old account administrator sends funds directly to your new administrator, who deposits the money into your new account.
One important difference between direct and indirect rollovers is withholding. Funds sent to you in an indirect rollover are subject to tax withholding: 10% for IRA funds and 20% for 401(k) and other employer-based plans. You can recover these funds when you file your taxes as long as you can show you deposited the full amount withdrawn from your original account into your new one.
You can avoid withholding by choosing a direct rollover, which has the added advantage of fewer steps—and therefore less opportunity for something to go wrong.
Are There Fees or Tax Penalties for IRA Rollovers?
Most brokerages and financial advisors don't charge rollover fees. But you may pay transaction fees on investments you buy or sell within your IRA and management fees on mutual funds.
As long as you roll your funds from one qualified account to another within 60 days, you should not incur penalties or additional tax from the IRS. If you miss this deadline, you'll pay income tax on the money you withdrew and a 10% early withdrawal tax if you're under age 59½.
A final bit of good news: Rollovers don't count toward IRA or 401(k) contribution limits for the year. You can still contribute the full amount you would be entitled to if you did not roll over funds.
Growing Toward Retirement
Moving your retirement accounts into a single IRA can prevent you from having to track and maintain multiple accounts for the rest of your life. In addition to streamlining your finances, use this opportunity to evaluate your account provider and your investments to make sure they align with your retirement goals.