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What to do with previous 401(k)s

Chris Farrell Sep 15, 2011

Question: I am currently in my 3rd job out of college and have 401K accounts with my two previous employers. I am wondering if I should roll the money over into a Roth IRA or if I should put the money into my current employers 401K? Are there any other options? Ashley, Minneapolis, MN

Answer: First of all, I think it’s terrific that you’ve participated in your employer 401(k) plans even as you’ve changed jobs. You have several options to choose from.

I favor taking the money out and placing it into a rollover IRA. The reason is that you get to choose -not your employer–what are your investment options. The IRA gives you greater investment choice and flexibility. There also a benefit to putting the money in your possession rather than keeping it at a former employer.

If you do roll the money over into a traditional IRA make sure it’s an institution-to-institution transfer so that you preserve its tax-sheltered status. Check with the human resources department of your former employers for their procedures to transfer the money, as well as your financial institution.

What about a Roth-IRA? It can be a good move. A couple of caveats: A simple test is do you have the savings to pay the taxes on converting into a Roth. I wouldn’t do it if you have to use the 401(k) money to pay the tax bill. You also have to decide that paying taxes now is the best use of your savings. For more detailed analysis I would tap into a good IRA calculator, such as the one at analyzenow.com.

Last, if you really like the investment options in your current plan you can always transfer the money into it, assuming your employer allows it. (Most do, but they don’t have to accept the money.)

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