The days of working 30 or 40 years at one company and retiring with a pension and a gold watch are almost over. In fact, a 2012 study by the Bureau of Labor Statistics showed that the median time period that workers had been with their current employer was 4.6 years. That means a young worker starting in the job market today could easily work for 8-10 different companies or more over the length of his or her career.
One result of this trend is that you can easily leave a trail of 401(k)s and other retirement accounts behind you as you move from one job to the next.
You have three options:
Cash it out
Unless you are on the verge of bankruptcy or homelessness, this is never a good idea. If you cash your retirement savings out early you will in most cases get hit with a 10% penalty plus your tax rate by the IRS. This will likely consume a third to half the money plus you lose out on all future earnings.
Leave it there
In most cases you don’t actually have to do anything. The easy solution isn’t always the best though.
Take it with you
You can take your old account and do a direct rollover to an IRA or a Roth IRA. This is almost always your best option for several reasons.
Life is always easier to manage when you can keep it simple. What would be simpler? Having one IRA to manage or 10 old 401(k)’s floating around with different companies? Obviously one IRA is much easier.
2. You don’t have to deal with your old company
Hopefully, you left your old company on good terms, but still would you rather deal with the old HR department anytime you want to make changes to your account, or do you want the money under your control? What if your old company goes out of business or is bought out? While your money may be safe if it is invested in good mutual funds, figuring out how to get to it may be more of a headache than you desire.
3. Better options for investment
Most workplace 401(k) programs have a limited list of potential investments. Those investments could be good or they might not be. But if you roll the money into an IRA that you control you can invest them in anything. More options are always better.
One of the primary keys to successful investing is diversity. You want your money spread across as wide a variety of investments as possible. That way if you have an investment in a company that is going bankrupt, chances are very good you have money in another company elsewhere that is having the best year in their history. When you have one IRA to manage it is easy to make sure your money is well spread out among a variety of investments. If you am trying to manage 10 different accounts though, it is much more difficult to do this.
5. Easier to avoid big tax mistakes
One of the advantages of traditional retirement savings accounts is you don’t have to pay taxes until the money is withdrawn from your account. Figuring out the proper tax amounts will be easier if it is coming from a central account. The biggest reason though is at age 70 and a half you are required to begin withdrawing a percentage of the money. If you have one account, determining what the required distributions are is not too difficult. If you have many accounts though, you will need to figure out how much you need to withdraw from each one. These calculations can get very complex, very quickly and if you make a mistake you may open the door to significant penalties from the IRS. Again simple is always better.
6. Lost money
The last thing you would want is to have accounts that are forgotten. But consider the chances that when you are retiring at age 65, you might forget about that company where you worked for 2 years back when you were 25. Meanwhile that account has been steadily growing over 40 years and may have a substantial sum of money in it. That’s not the sort of thing you want to forget, but it happens.
Roll your 401k into an IRA
A few years ago I was downsized from a company where I had worked for 21 years. I rolled that 401k over to an IRA and it couldn’t have been simpler. I simply found a local investment adviser whom I could trust and he helped with the paperwork required to set up my IRA and request the funds be transferred from my old account.
Don’t leave a trail of old accounts behind you over the course of your working career. It is your future that is at stake. Make sure you can manage it simply and wisely. Take the time to roll your retirement accounts over to a central account that you control when you change jobs.
Do you have old retirement accounts still with former employers?
Photo credit: LendingMemo (creative commons)