Consolidating your 401Ks into a rollover IRA has become an absolute necessity. Why? Most of us are collecting them like memorabilia. There is no loyalty in the workplace any longer – from both employees and employers. The average duration of employment is typically less than two years.
Specific duration of employment by age group numbers are:
– For ages 23-27, 75% of workers were with their employer for less than 2 years.
– For ages 28-32, 68% of workers were with their employer for less than 2 years.
Those numbers drop, but not significantly, as people age. And the average number of jobs held by those born between 1957-1964 (up to age 44) was at 11.
If you are a serial job changer from age 22 to 65, you could easily accumulate over 20 401Ks in your career!
Why you Should Consolidate 401Ks into a Rollover IRA
Rolling over a 401K does not count towards your IRA contribution limits and there are a number of good reasons to consolidate your 401Ks by moving them into a rollover IRA.
1. IRAs have Lower Fees than 401Ks
As of the year 2012, 401K administrators are now required to disclose all fees and the result should be eye opening for everyone.
Many IRAs have no annual fees. 401Ks do. Beyond that, there are often obscene percentage of 401K asset fees in 401K plans. Fees can be as high as 1.9% of assets annually but average about 1.3% for plans with fewer than 100 members, which account for 88% of plans
Check out my post with a list of online brokers for a complete list of IRA fees. My personal faves for low costs are Vanguard and Fidelity.
If you have multiple 401Ks, each with annual or other administrative fees, it will eat in to your returns.
2. IRAs have More Diverse Investment Options than 401Ks
401K plans offer an average of 26 funds – which is quite sad. In an IRA, you should have thousands of ETFs, mutual funds, index funds, stocks, bonds, etc. available to you. Diversity is extremely important when it comes to investing – and 401Ks rarely provide it.
In the three employer’s I’ve been with since graduating, I have found the fund options to be a bond fund, small, medium, and large cap domestic growth and value funds, a REIT, and a token international fund and maybe a second set of each just so they can say you have choices. THAT IS NOT CHOICE!
401K administrators often receive a cut of each of the crappy, over-priced mutual funds they push to employers in the % of asset fees mentioned earlier. There is a conflict of interest there.
What about low-cost ETFs and index funds? And all the thousands that provide you more diversity, such as commodities, emerging markets, etc.? You will rarely find them in a 401K.
3. IRAs have Better Investment Options than 401Ks
Getting a new employer’s 401K and logging in to find a buffet of 18 pieces of crap is kind of like a young child waking up on Christmas morning to find that Santa left him nothing but socks.
While some argue that too many options is overwhelming, I’m all about freedom of choice. That is why I even went so far as to switch my 401K to the elusive self-directed brokerage 401K.
4. Consolidation Gives you a Better Handle on your Investments
When you have multiple 401Ks, it can become extremely difficult to keep track of your investments and understand what your diversification is into different asset classes.
Consolidating those 401Ks into an IRA allows you to do just that and is one of the ways to optimize your 401K.
I’ll detail how to roll over your 401K into an IRA and possible downsides in the coming week.
401K Rollover Discussion:
- Have you rolled 401Ks into an IRA?
- What benefits have you seen from rolling your 401Ks into an IRA?
- Have you looked at your new 401K fee disclosure yet?
Related Posts:
I just did this with Fidelity and it was real easy. Nice to have everything in one place and to have more choices.
In my 20-, 30- and 40-somethings I was changing jobs about every two years. And, it was easy to lose track of 401K, 403Bs. After a few job changes, I realized consolidation was the only way to go. However, one plan had an 8% back end load…YIKES. Be careful before rolling over–know the fees.
However, changing jobs frequently can make it difficult to contribute to a 401K plan since most require you to work for the company for 6 months-1 year. Here are a few tips to work around that:
1. If you can’t contribute at work, add funds to your existing IRA. It may not have tax benefits–but it’s about saving for retirement.
2. Consider opening a Roth so you always have a place to contribute regardless of your employement status.
3. As soon as you are eligible, maximize your yearly contribution. For example, if you become eligible in November–consider contributing 50% of your income in November and December to get the maximum tax benefit and contribution to the plan. Check with your employer to see if they will allow large contributions.
I’m guessing you are talking about consolidating all your 401ks from previous jobs, right? Dont you want to keep the current employer’s 401k because of the matching?
What about if you are given the option to roll over into your new employers 401k? Would it just depend on the fees?
So once you max out employer matching on your 401k, does the rest of your annual maximum go into your IRA?
Yes. Previous. You can’t roll current employer’s over.
You could roll into, however, there’s no benefit to doing so (I’ll talk about in upcoming post).
In many cases, I would agree with G.E. and say that rolling to an IRA makes more sense. However, in the following two cases I would recommend staying with a 401k or rolling into a 401k:
Keeping Money in a 401k
1) If you work for a (probably large) company that has excellent 401k funds with extremely low expense ratios for funds you would otherwise invest in in an IRA that have higher expense rations, it would make sense to keep money in the lower expense funds in your 401k. Obviously, you’ll want to do the math to insure that expense plans don’t eat up these savings, but with larger balances and a good plan, your 401k could be a better option. The assumption here is that the good 401k has access to institutional type funds that you are unable to get as an individual in your IRA.
2) You are planning to retire between 55 and 59. Currently, you are able to withdraw your 401k contributions penalty-free from the company 401k you retired from the age of 55 onwards. Obviously, at 59.5 you don’t need to worry about this anymore as you can draw all your 401k or IRA contributions penalty free. (You can also do a 72t distribution prior to 59.5 to avoid the penalty, but that’s another matter.)
But in the case of retiring before 59.5 but after 55, you’d likely want to roll-over as much money as needed into your current 401k to withdraw for retirement between ages 55+ to 59.5 to avoid any penalties.
Some company 401K plans will allow you to roll your previous 401K into the current plan. One job I had, for a large financial investment firm, had an excellent 401K plan with several dozen choices and the fees were less than those in an IRA account. Of course, for every excellent 401K plan I’ve been in, there were several 401k plans that only made sense because of the company matching.
I recently converted for all the reasons you mentioned. My first year fee savings from the switch will exceed $500
Here’s another tax planning reason to not roll over your 401k to an IRA. When you convert an IRA to a Roth IRA you need to take into consideration all of your IRA’s to calculate your tax impact. But if you convert a 401k directly to a Roth IRA you are not impacted. Here’s the strategy for early retirement. When you stop working at say 55 you have several years where your earned income is low and in those years you can convert your 401k accounts to Roth IRA accounts (say $20k year for 10 years). Yes you will pay tax on the conversion (taxed as ordinary income) but at a relatively low marginal rate (and you should pay the tax out of other non-tax deferred savings). Then you will have $200k + earnings in a Roth IRA that is tax free for the rest of your life, although you must wait 5 years until you start withdrawing. I also believe that Roths are better for you heirs to inherit than standard IRA’s.