Roll Over Your Old Retirement Accounts
Why rollovers are the best option.
A lot of people probably invest for the first time when they enroll in their workplace retirement plan — most likely a 401(k). And unless they actually take the time to learn about their investment options or what they’re signing up for, they might put a percentage of their income in every paycheck and then not think anything more of it.
But if this describes you and you’ve now moved on to another job, it’s time to roll over your old account.
Why You Should Roll Over Old Accounts
When you leave a job, you have three options for handling the retirement account you leave behind:
Cash it out
Leave it where it is
Roll it over to a new retirement account
The absolute worst thing you can do with a 401(k) after you leave a job is to cash it out. That’s because you’ll not only be required to pay taxes on the money but an additional 10% early withdrawal penalty. And there’s also the opportunity cost of not leaving the money invested for the long term.
You can also leave your retirement account where it is. There are some exceptions. For example, companies are allowed to cash out your 401(k) balance if your assets are under $5,000 and send you a check or automatically roll over your funds to a rollover IRA. But even if you can leave the account at your old employer, there are good reasons to roll it over into either your new job’s 401(k) or an IRA you set up.
First, doing a rollover — moving tax-advantaged money from one account to another without tax consequences — will ensure the money remains dedicated for retirement. This beats taking the huge tax and penalty hit of cashing it out.
Second, keeping all your retirement investments in one place keeps things simple. Five different accounts can be difficult to manage or remember. If you hop jobs frequently, you could end up with several accounts that are hard to keep track of. And this comes with risks, like forgetting about your old accounts.
There were 24 million forgotten 401(k) accounts according to 2021 data. And the average balance of forgotten accounts was more than $50,000. After you leave a job, it can be easy to forget about an old 401(k) plan, especially if you were automatically enrolled and never put a lot into it. Rolling over your old accounts soon after you leave a job means you don’t have to worry about forgetting them.
Third, by rolling over your old accounts, you gain more control over your investments. This is especially true if you choose to roll them over into an IRA rather than your new employer’s 401(k). When you do this, you get to choose exactly where your money goes and what you invest in.
And last, fees in 401(k) plans can be steep. Taking your money out can mean escaping high-fee mutual funds or administration fees that drag down your investment performance over time and let you keep more of your money.
How to Find Your Old Retirement Accounts
If you know you have old 401(k) or other retirement accounts you’ve left behind, the next step is to track them down.
First, try contacting your former employer. This is the most straightforward way to find an old retirement account. You’ll have to hand over basic personal information like your Social Security number before getting what you need. From there, you can use the information you gather to begin the rollover process.
If your employer no longer exists or they’re unable to provide information about your account for any reason, you can search the National Registry of Unclaimed Retirement Benefits database for your lost account.
The longer you wait the more work you’ll have to do to find your old accounts, so get it done soon after leaving your job.
How to Roll Over an Old Retirement Account
You have a couple of options when rolling over old retirement accounts.
If you have a 401(k) at a new job and the investment options and fees are reasonable, you may consider rolling your old accounts into there. This makes it easy to keep track of everything in one place.
But there’s also a good case for rolling it over to an IRA. If you choose this route, it’s a no-brainer to choose a low-cost provider, like Fidelity, Vanguard or Schwab, so you pay minimal fees and can invest in virtually anything you want.
What kind of account your old workplace plan gets rolled into also depends on the tax treatment. If it’s a traditional, pre-tax account, it’ll get rolled over to a traditional IRA or 401(k). If it was a Roth account, such as a Roth 401(k), it’ll get rolled over into a Roth IRA or Roth 401(k). Keep in mind that if you have a Roth 401(k) from an old job but your new job’s 401(k) plan doesn’t allow for Roth accounts, your only option is to roll it over to a Roth IRA.
The best way to start the rollover process is to do it from the end of the receiving institution. Generally, the receiving institution, whether that be a low-cost provider or your new job’s 401(k) plan, makes it easy for you. After all, they’re happy to accept your money. They will take care of any necessary paperwork and the pain of transferring the assets. They may even pay any fees associated with the transfer.
There’s also a difference between a direct and indirect rollover. A direct rollover is simple; the receiving plan or institution will pull your assets into the new account after you start the process. An indirect rollover occurs when your old plan sends you the money and leaves you responsible for depositing the money into your new account. You have 60 days to complete this upon receiving the money or else it becomes a taxable distribution. You should opt for a direct rollover when you can.
Most institutions have an option for beginning the rollover process and will guide you through it.
Roll Over Your Old Accounts
While this post mostly describes 401(k)s, it equally applies if you have 403(b) accounts, SEP-IRAs, SIMPLE IRAs or most tax-advantaged retirement accounts.
The last thing you want to do is forget about old retirement accounts that could be put to use and invested for your future. You also don’t want to complicate your financial situation by leaving a half dozen accounts floating out there. It’s well worth the time and effort to roll over old accounts so you have better control over them and ensure they are safe in your possession.