Best Way - Why You Should Roll Over Your 401(k)

Why You Should Roll Over Your 401(k)

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By Carmelo J. Montalbano
eHow Contributing Writer

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There are compelling reasons to roll over your 401(k) payment from previous employers. Rollovers occur when employees discontinue company-sponsored programs or leave the employ of a sponsoring company. The logical step, in almost any situation, except for an emergency, is to roll over the 401(k). This article presents the primary reasons for rolling over your 401(k) and continuing to accrue the tax-exempt benefits.

The Economic Sense of Rolling Over a 401(k)

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The cost of not rolling over a retirement account is considerable. You will be responsible for state and federal taxes on the entire amount not rolled over. Penalties, in addition to taxes, can be up to 10 percent of the gross amount if you are not over 59 1/2. In addition, you will have to consider the fact that the additional income may raise the income tax rate for all monies earned. Finally, trustees of the plan are required to also hold 20 percent of the gross amount for withholding purposes.

The more important argument is that you can continue to let your savings accrue and compound until you retire when they will be taxed at a lower tax rate. Some investors, planning to later draw on their Social Security payments, will draw down their retirement savings first, postponing Social Security, so that the much higher payments from Social Security that come at age 70 1/2 can be earned.

Practical Considerations Why a Rollover is Appropriate

Investors who may have several 401(k) accounts from previous work are paying many annual fees for investment management and for acting as trustee. Review the performance of all your outstanding 401(k) accounts and see if you could not do better by transferring them. You may roll over your 401(k) account to your current work plan or into an IRA account. If you are satisfied with your 401(k), currently transfer all your accounts into your work account. Otherwise, save annual maintenance fees and consolidate assets by moving your 401(k) accounts (except for your current employer) into an IRA in your name. Understand however, that you will be responsible for directing your IRA unless you invest in a family of mutual funds that will allow investment in money market, bond and stock funds.

Time Considerations for Rollovers

There is no immediate reason to move a 401(k) at any time. You must begin withdrawals by age 70 1/2, however. If you do not like the 401(k) options with your present employer and do not want the responsibility of running an account yourself -- choosing when and where to invest with respect to diversification, income needs, and proper money management -- you could leave the account where it is. However, accounts ( there may be minimum account requirements, check first) can be turned over to a mutual fund or money manager for a fee. This is a very reasonable alternative for most investors. Rolling the account over to a new manager always begins with the present trustee holding the assets. Thus, contact the existing trustee to begin the transfer once a decision has been made. Be cautious about errors as it can seriously delay a process that will take a minimum of two months.