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Consolidating Your 401(k) Accounts

Changing jobs has become the norm rather than the exception. According to the Bureau of Labor Statistics (BLS), college-educated Baby Boomers on average held about 12 jobs from the ages of 18 to 48.1

With multiple jobs at different companies, odds are you may have several 401(k) retirement plans with former employers. And with too many separate accounts comes the possible burden of coordinating multiple statements, understanding your appropriate asset allocation mix, managing different fee structures and rules—making the exercise of retirement planning that much more challenging.

You may want to consider simplifying your retirement planning by consolidating your accounts. Here are a few factors to weigh before taking action.

Before you leave a job, understand your old 401(k) plan’s rules around keeping the 401(k) assets of former employees. Some employer-sponsored retirement plans may not allow you to keep retirement money in their plans after employment has ended. Keep in mind that if the balance is under $5,000, a plan may force you to take action or in some cases automatically distribute the proceeds to you.

If the provisions permit former employees to remain in the plan, you will be limited in what you are able to do with your money. For example, you will likely be able to re-allocate your funds among the current investment options but you will not be allowed to make contributions.

Rolling 401(k)s into Your Current Plan

Given the limitations on your former employers’ 401(k) accounts, you could roll your old retirement plans into your current 401(k). In this case, check with your current Plan Administrator to see if the plan will accept rollovers from a previous employer.

Even if permissible, remember that all 401(k) plans are not created equal. Many 401(k) plans are contracted between the sponsor company and the underlying financial institution with their own specific fee structure, investment options and plan provisions. Ensure this option is beneficial for you by comparing fee structures and investment choices.

Rolling 401(k)s into an IRA

It may make sense to roll over your 401(k) retirement assets into an Individual Retirement Account (IRA).  An IRA may come with greater flexibility and more choices than a 401(k) plan. For example, IRAs can have lower fees. Additionally, you could have the ability to invest in a wider variety of asset classes and financial vehicles than 401(k)s.

And unlike your former employer plan, you can contribute to your new consolidated rollover IRA. Contribution limits and deadlines would fall under IRA regulations by the IRS.

The Option of Cashing Out

When you leave a company, you have the option to have your retirement assets from that employer sent directly to you. Depending on your financial situation at the time, this may be a tempting possibility—but costly.

If you decide to cash out of your 401(k), your withdrawal will be subject to a mandatory 20% federal withholding. On top of that, if you are under the age of 59½, you will likely be responsible for a 10% early withdrawal penalty. Not only are there penalties, but that withdrawal will be considered taxable income for the year and could possibly move you into a higher tax bracket.

Need to Find Old 401(k)s?

Wondering if you have an old 401(k) with a previous employer? First try to contact that previous employer directly as they should be able to provide the proper paperwork so that you can roll over your former plan into your current 401(k) or to an IRA. In the case where a former employer no longer exists, you may need to find an old statement to contact the Plan Administrator directly.

Whatever decision you make when consolidating your 401(k)s, know that Jemma Financial can help you navigate the process so you can make the best decision that’s right for you.

1 “Baby boomers born from 1957 to 1964 held an average of 12.3 jobs from ages 18 to 52,” U.S. Bureau of Labor Statistics, 8/27/19.

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