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Rollover IRA
Question: I was recently laid off and told that because my 401k balance was below 5k I would need to move the money. I do not want to cash out and would like to avoid paying any taxes on the funds. I currently have 3 other 401k accounts with previous employers. What are some of my options for these investments? Natalie, West Chester, OH
Answer: You'll want to do what's called a "rollover IRA." There are no tax consequences or penalties so long as the money is transferred from your former employer directly into the rollover IRA account. Check with human resources before you do anything to make sure you understand any requirement the company may have about a rollover. The same goes with the company you've chosen to place your rollover IRA. And if you put the money into a comparable investment you shouldn't take much of a hit on the transfer, either.
Now, as to your other 401(k) accounts at 3 previous employers, why are you keeping the money there? If it's because you really like the plan options offered by these employers, fine. But my bias is for you to take control of the money through a rollover IRA. "It's great anytime you can take control of your money and take it out of your company plan," says Ed Slott, head of his eponymous company and a leading IRA expert.
You're no longer working for these companies. It's your money and if it's under your control you'll watch it carefully. Plus, you get to chose the investment company and investment options, not your former employer.
It's quite possible that the plan providers from your 3 old jobs have been charging you above market rate fees to be account custodians. You're probably better off consolidating all the 401k accounts into a rollover IRA with a mutual fund company like Vanguard or Fidelity. If you're a really active stock trader you could even go for a discount brokerage.
If you have the cash and a new job, converting some of the money to a Roth IRA might be wise on a year with fewer months of income to pay taxes on. Just make sure that it's a conversion and you never touch the money outside of a tax sheltered setting, or you will have to pay the 10% penalty on top of your tax rate.
