I have a few 401(k)'s from previous companies that I worked for, should I combine them into an IRA?
Answers | 8
I wrote an article about this a week ago on MoneyTips. You can check it out here. https://www.moneytips.com/what-should-i-do-with-my-old-401k-know-your-options
If you are young and in a low tax bracket I would consider moving some or all into a ROTH IRA if you can handle the tax consequences. Consult with a tax adviser first so that you know how it would effect your tax situation.
I get this question a lot on my radio show, InvestTalk. If you ever have any questions feel free to call in to the show and ask or contact me directly.
Be aware that much of the financial advisory industry has big incentives to have you put the money into an IRA (and offer to manage or invest it for you) -- and often that's a good idea -- but absolutely not always.
So, aside from the convenience of having it all in one place, consider the following for each former employer:
(a) does the plan have good investment options?
(b) does the plan charge expenses (either high-expense investments or other fees that hit your accounts such as custodial or maintenance fees)?
(c) is the custodian easy to deal with (i.e., do they have a good website, can you easily rebalance your portfolio, etc)?
(d) is the former employer easy to deal with (i.e., is it a large stable company you can easily contact, etc)?
If your current employer's p[an is good -- no fees, good investment options -- consider rolling all that money from the former employers plans into your current employer's plan rather than into an IRA.
If your current employer's plan is not great -- and the former employer plans are also not great -- then consider rolling it into an IRA (and I recommend keeping all such rollover money in a separate IRA, distinct from any IRA account to which you made direct contributions -- to facilitate possibly rolling it over again into another employer plan in the future).
So why prefer an employer plan over an IRA? (a) it preserves options to do lower-cost Roth conversions if you are making non-deductible IRA contributions; (b) employer plans have better creditor protections under federal law; (c) some employer plans give you access to great investment options you may not easily get with an IRA; and (d) you can always roll into an IRA in the future, so there's generally little downside; (Oh, and (e) earlier penalty-free distributions; and possibly (f) if you're still employed, no RMDs until you retire -- this last one is huge if you're approaching 70 and still working!)
The key is - all that is only worth it if the 401k is a good or great one. I see lots of those -- but I also regularly see awful ones with terrible investment options and high fees.
Why prefer an IRA over a 401k? (a) lots more investment options; (b) directly dealing with the custodian and not having to deal with an employer or former employer; (c) you can work with an advisor of your choosing if you like; Also it makes it a lot easier to administer in general.
I highly recommend consulting with an *hourly* fee-only financial planner. You may pay a few hundred bucks for an hour or two of his time. Do *not* ask your bank (they'll tell you to roll it into an IRA there) - and if you consult a fee-only planner who gets compensated as a percentage of assets under management, well, he only gets paid if you have assets under his management.
(Disclosure -- I do both hourly work *and* asset management work.)
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